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Sec 85, Us 42, Washington 21, U.s. 20, United States 18, Bernard Madoff 16, China 10, Shelby 9, America 9, Basel 9, Texas 9, Goldman 7, Louisiana 7, Europe 6, Robert Allen 6, Geithner 6, California 5, Paulson 4, Mr. Khuzami 4, Alabama 4,
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  CSPAN    C-SPAN Weekend    News/Business.  

    September 25, 2010
    10:00 - 2:00pm EDT  

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about the cross section, but how is that rep? how is the opinion of 1500 people representing of 3 billion? thank you and i will listen to your response. guest: let me start on the last one first. what we did regarding the surveys is, in fact, what people regarding -- what people do regarding service. this is what you do. you get a cross-section. you use certain techniques. thes is no different than surveys in terms of methodologies that the surveys you read all of the time. if it is our true that our survey does not represent the pulte -- the population, then a new survey does either. regarding the question about civil unions, i think that is a very interesting question. many people say i am opposed to marriage. that conveys and means something different. there is a difference between
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marriage and a civil union. one difference is a very simple one. if you are married, you are in a different tax rate because you are a married couple. if you are in a civil union you are not. ironically, in many cases not being married is a financially beneficial. ironically, by not allowing same-sex couples to get married we are not getting the same taxes from them that we would get. about the 2% vs. the 98%, it has never been a question of what is the largest percentage of people and just benefiting them. the united states has always been concerned about both those with power and those without power. we provided rights and benefits to all different types of groups regardless of the size. the question is not size.
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the question is what do americans think is very? it appears at this point that americans are moving toward an idea that same-sex couples so it is only fair that they be defined as a family. host: the book is "counted out -- same-sex relations and america's definition of a family." brand call from indiana university has been our guest. thank you for your time -- brian powell has been our guest. coming up tomorrow, we will take a look at politics. how the tea party movement is remaking our two-party movement. he is the head of rasmussen. we will also have at peggy orchowski who will talk about the immigration issues focusing on the dream act. we will talk about arizona's
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immigration as well. then we have dr. gerard gioia about protecting student athletes from concussions. there was a meeting that took place on that this week. that is all one "washington journal" tomorrow and 7:00 a.m. we will see you then. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] . >> you are watching c-span, created for you as a public service from america's cable companies.
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testimony from treasury secretary timothy geithner on the state of the global financial system. after that, more financial programming with remarks from federal reserve chairman ben bernanke on the 2008 crisis and the current state of the u.s. economy. >> jane addams revised -- advised every president and was a vocal advocate for civil justice. this weekend, a biographer on the contributions of jane addams, part of this weekend nonfiction books and authors. >> this weekend, explore the reality behind the science- fiction, einstein, and the fundamental forces of the universe. he has written more than a half- dozen books.
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join our three-hour conversation with your calls, e-mail, and tweets. >> for all of the people in the book, there are many mistakes they might have made in their lives but moving to the south was not one of them. >> nearly 6 million african americans migrated from the south. sunday night, a pulitzer prize winner on their journeys at 8:00. earlier this week, the senate banking committee reviewed the report by the sec inspector general. in that report showed the sec expected stanford was operating a ponzi scheme as early as 1997 but failed to take any action for almost eight years. we will now hear testimony from the inspector general during
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this two-hour i am late getting up here and i apologize to everyone. i will make some brief opening comments. my hope is that we will go right to our witnesses so we do not delay because we are a little bit behind. if people want to be heard, i always get people to write to express themselves on these issues. today is an important hearing. let me thank my colleagues for yesterday as well.
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i am very grateful for the senators that chaired the hearing and my colleagues that showed up to participate. >> i am very much interested in doing something that would promote infrastructure and private sector investment. i think you passed the baton to senator kerrey. i attended a hearing yesterday. we talked about some of the concerns and parameters. >> this morning is an oversight hearing of the sec inspector general report of the response to concerns regarding robert allen stanford's alleged ponzi
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scheme and improving as ec performance. senator shelby was one of the ones that wanted to see this hearing conducted. we have new leadership for the sec but i think it is important to examine what has happened and to prevent something like this from happening again. the hearing this morning is a result of their efforts. the bank committee is holding a hearing today on the oversight report of the alleged ponzi scheme. the committee will review the report and the commission's failure to stop the fraud in a timely manner. we will hear about the steps it has taken to fix the problems and to restore investor confidence. last august, the bank the committee held a hearing on the alleged fraud.
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the senator had a hearing and louisiana. he asked me if he could do that. he did a very good job with that hearing in louisiana. it was a very well conducted hearings and done in a responsible manner. i thank him for that. last year, we held two hearings in regard to the bernard madoff fraud. those hearings contributed to reforms that we included in the consumer protection act to better and power and equipped the sec to do its job. today's hearing build on those and reflects our work with ranking member richard selby. the hearing looks to the past performance but also the future commission actions for improvement. let me review very quickly the situation. in january 2009, the sec charged robert allen stanford's and
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several associates with orchestrating and $8 billion ponzi scheme. according to the complaint, the defendants promised and probably high interest rates and misrepresented to purchasers that their deposits were safe, that the bank rate invested clients' funds primarily in liquid financial instruments. although the examination staff found strong evidence that stanford was likely operating a ponzi scheme as early as 1997, the commission did not bring charges against him until 2009, 12 years later, only a month after bernard madoff's boehner on the scheme was exposed. in march of this year, the sec office of the inspector general released its report on the response to the ponzi scheme. if found that a central problem was the failure of the district
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office enforcement staff to heed the warning of the examination staff. the report showed the examiners at the fort worth district office raised red flags about the operation. conducted over eight years beginning in 1997, concluding in each examination that stanford's cd's likely a ponzi scheme or a similar fraudulent scheme. the enforcement staff disregarded the repeated warnings, continually turning a blind eye for nearly a decade. one side of the agency was screaming that there was a fire, and the other side said the fire was too hard to put out or if it didn't exist. the report found that one reason why those they did not want to investigate was the perception that the case was difficult, novel, and not the type favored by the commission. it raised in number of troubling
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facts about the head of the fort worth office that played a significant role in multiple decisions over the years to quash investigations of mr. stanford. this painted a picture of regulatory disconnects and mistakes that allowed this fraud to harm families and communities across our nation. we look forward this morning to learning what the commission attributes to this shortcoming. investors may have lost up to $8 billion. you cannot put a number on the damage of investor confidence. i look forward, as my colleagues o, the inspector general's discussions on his findings and i appreciate him being here. i hope this hearing will provide the committee, the senate, and the public with a clear view of
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how such a large fraud was allowed to perpetrate -- perpetuate and grow and what is being done to fix this system. the dodd frank bill was a large step in giving the sec more power and having periodic reviews. our work is obviously not done it. the report makes very thoughtful recommendations regarding bringing enforcement actions in complex cases, evaluating the performance of the staff, coordinating between offices and divisions, and other matters. investors deserve to know there is a cop on the beat working hard to protect them from fraud, restoring investor confidence. it is vitally important as we recover from this economic crisis that the sec use all of its resources at its disposal to
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work towards that end. i should also say before turning to senator shelby because i think is important to make this point. we are going to talk about the office in fort worth and some people here in washington who should have done a better job. i think it is always important to also point out and recognize the thousands of people that work at the sec that do an incredible job every day. i don't want a hearing like this that we focus on the errors of some to contaminate the hard work done by others. they do a good job of every day. also the questions will be tough this morning about what happened, i want the employees who are not in this room to know how much we appreciate how hard they work every day for our country. i want my opening remarks to reflect those attitudes as we go forward. >> thank you, mr. chairman, for
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holding this hearing. this case represents a major failure by the securities and exchange commission in carrying out its investor protection mandate. investors were defrauded of billions of dollars and thousands of victims have had their lives shattered. one of those victims was from my home state of alabama and testified on the case. we now know that alan stanford openly flaunted the money that he stole from executives. he used it to buy it a part of a caribbean island to bribing regulators and fund sporting events. his victims deserve to know how this could have happened. last october, i sent a letter to the inspector general of the sec to ask him to supplement the review that had been conducted of the sec's record in the
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matter. we asked him to look into the history of the fcc's oversight. what we learned was extremely disturbing. the findings, which we will get into, it indicates that the sec produced reports in 1997, 1998, 2002, and 2004 that determined fraud was occurring. enforcement action was not taken following the findings, even though the examination staff repeatedly requested that the enforcement staff pursue such action at the sec. the inspector general found that a particular member of the staff involved in making the determination not to pursue enforcement actions later sought employment with stanford. ultimately, it was not until the bernard madoff ponzi scheme was uncovered that in the action was taken in this case despite all
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of these warnings. it in the end, the inaction allow the fraud to grow larger and swallowed numerous victims. i believe this gross negligence involves even more significant failures then were present in the bernard madoff fraud in some ways. in contrast, with the sec examiners did not find the fraud, in this case, give them credit the examiners were not only aware, they prevailed to take action, yet refused. the findings of the gross negligence in the report are not only troubling -- are not the only troubling aspect of the sec conduct in this case. the sec chose to release the report in the height of congressional action and on the very same day they announced the
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decision to pursue charges against goldman sachs. in many ways, it appears that the timing of the release was intended to draw the least amount of scrutiny. today, we will hear from the heads of the sec examination agency and enforcement programs and the head of the fort worth office. i think this marks the beginning of our review of this troubling episode. we need to know exactly what evidence of fraud was not more thoroughly pursued and who was involved in reviewing this evidence and why they failed to connect the dots. we need to examine the commission's general response to these findings so that we can be sure that corrective measures are being taken to prevent a repeat of these failures. otherwise, we will go down this road again. senator dodd, i appreciate you holding this hearing and i look forward to the inspector general
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testified. >> thank you very much. david, you had a very good hearing in louisiana six months ago, whenever it was, and i thank you for that. i also think senator shelby -- i think senator shelby. >> very briefly, first of all, thank you and thanks to the ranking member for all of your help to me and all of your leadership on this. this is a very important matter to me because so many victims live in the louisiana, and you all have been extremely supportive in helping us follow up on this, including that hearing in louisiana and including this hearing today. i concur with your comments and senator shelby's comments. this is not just one major disappointing scandal. it is really free. it is the original stanford
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ponzi scheme fraud, which is horrible and created so many victims, including some many in louisiana. on top of that, it is the inaction by the sec, which i think is absolutely scandalous now that we are finally discovering all of the facts. on top of that, number three is this conscious effort that senator shelby alluded to of the sec trying to write -- rewrite history. this is very disappointing and frustrating, and we have to ensure this does not happen again. we have to do everything possible to properly handle the ongoing issues with the victims. >> thank you.
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>> i also want to admit that so many of my constituents in texas were victims. reading the report is stunning. it is spending the amount of times the sec has noted from the board in front internal reports that the field office and yet years went on. i thank you for holding this hearing. i hope that with the report we will be able to a short there are systems in place at the sec that will even been made this in the future and go forward so that people can have confidence in their investments with someone as big as mr. stanford. thank you. >> senator johnson. >> [inaudible]
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>> certainly. let me say as well, i suspect -- we did some things in the financial reform bill that we enacted. i think there are other areas that may require some legislative action. that will be the job for tim johnson and richard shelby and members of the committee. i will not be a part of it -- [laughter] i will regret not being here. i think there are some areas here that we did not include and cover in our legislation that made war and some legislative action. i will leave that to others to make that determination. i want to introduce our inspector general. let me introduce the second panel as well. david cotts, he has served as
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the inspector general sense december 2007 and leads a team of investigative staff to uphold the efficiency and integrity of the sec. he testified last year. we thank you very much for being back here with us today. the director of the division -- he joined the staff in february 2009 he is responsible for the civil law enforcement efforts of more than 1200 s ec personnel. he previously worked as general counsel for the deutsche bank and before that served as a federal prosecutor. he testified last december.
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the director of the office of compliance and examinations at the sec in january 2010. he was a partner at price waterhouse coopers prevatt his expertise in risk management. rose romero been the regional director of an office at the sec. prior to joining the staff, she was the executive assistant to the united states attorney for the northern district of texas. she testified last august on the alleged stanford financial group fraud. we welcome the witnesses this morning, all of you.
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david, we will begin with your testimony. any information that you have will be included in the record it. -- in the record. with that, the floor is yours. >> thank you. thank you for the opportunity to testify before this committee today on the subject of the report on the sec response to the robert allen stanford's alleged ponzi scheme. my testimony today, i am representing the office of inspector general. the views i expressed to not necessarily reflect the views of the commission or any commissioners. i would like to briefly discuss the role of my office and oversight effort we have taken. we have staff in two major areas, audits and investigations. since i have become the inspector general, my office has issued audit report involving matters critical to
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programs and operations as well as the public, including an examination of bear stearns and the factors that led to its collapse. complaints and referrals for whistleblowers and an analysis of the oversight on credit rating agencies. my investigative unit has issued numerous reports regarding failures to pursue investigations vigorously or in a timely manner, in proper trading operations, preferential treatment given to prominent persons. in august 2009, we issued the report analyzing the reasons why the sec failed to uncover bernard madoff's parenti scheme. on october 9, 2009, i received a letter from richard shelby requesting a comprehensive investigation of the handling of the sec investigation and
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examination into robert allen stanford's. very shortly thereafter on october 13, we opened our investigation. as a part of this effort, we made numerous requests for the e-mails of current and former employees. the office of information technology provided e-mail's for employees from 1997 to 2009. researched over 2.7 million e- mails in the course of our investigation. we send comprehensive document requests specifying the documents and records we required for the investigation. we sought documents concerning communications between its predecessor and the sec concerning robert allen stanford's. we also conducted 51
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testimonies and interviews of 48 individuals with knowledge of facts and circumstances surrounding the investigation. i personally led the questioning in the testimony interviews. on march 31, 2010, we issue to the chairman of the sec and comprehensive report of our investigation of the matter, containing over a hedge a 50 pages of analysis. our investigation determined that the sec for worth office was aware since 1997 that robert allen stanford's was likely operating a ponzi scheme. a mere two years after the group co. investment adviser registered with the sec, we found over the next eight years the fort worth office conducted for examinations of the operation, finding that the operations could not be legitimate and it was highly unlikely the returns could have been achieved with the approach
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utilized. the fort worth examiner's conducted examinations of the stanford in 1997, 1998, 2002, and to the fore, concluding that the cd's likely a ponzi scheme. the only difference between the findings over the years was the potential fraud was growing exponentially. from $250 million to $1.5 million -- $1.5 billion. we found the enforcement group made no meaningful effort to investigate the potential fraud until late 2005. in 1998, the enforcement group opened an inquiry but closed it only after three months when stanford failed to produce documents in response to a voluntary document request. in 2002, another investigation was opened even after examiners uncovered securities frauds by
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stanford. after receiving three separate complaints about the operation, the group decided not to open up an investigation or even an inquiry and did not follow up on the complaint. in late 2005, after a change in leadership with the enforcement group, the enforcement group finally agreed to seek a former order from the commission to investigate stanford. however, even at that time, the group missed an opportunity to recommend an action against the company or submit a failure regarding stanford's portfolio, which could have halted sales of the cd's and would have provided investors and prospective investors that the sec considered the failure of the cd's to be fraudulent.
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the new head of the enforcement group at fort worth was not aware of the findings of the examinations of 1998 and 2002. we did not find the reluctance of the enforcement group to investigate stanford was related to any improper, professional, or social relationship on the part of any current or former employee. the influence within the enforcement group factored into its repeated decisions not to undertake an investigation of stanford. we found that senior officials received -- perceived it were being judged on the number of cases they brought, so-called statistics, and communicated that these cases were not favored.
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we also found the former head of enforcement in fort worth that played a significant role in multiple decisions over the years to quash investigations of stanford sought to represent stanford on three separate occasions and represented him briefly in 2006 before he was informed by the ethics office that it was improper for him to do so. our report concluded that the fort worth office was aware since 1997 that stanford was likely operating a ponzi scheme. after conducting examinations for eight years and what the fraud broke and fell to take any action to stop it. we provided the report in march 2010 with the recommendation that it chairman review its findings and share portions of the report that related to the performance their use by employees that still work at the sec so appropriate action could be taken. we also made the following
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specific recommendations to improve operations within the sec. it sure the potential harm to investors if no action is taken is considered as a factor whether deciding to recommend action. two come up enforcement of the sizes cases that are difficult but important to the protection of investors in evaluating the performance of the staff member or regional office. 3, enforcement -- four, that there be improved coordination between enforcement on investigations, particularly those initiated by a referral. 5, that enforcement reevaluate the factors utilized to determine when a referral of a matter of state regulators in lieu of an investigation is appropriate. 6, that there be additional training of enforcement step to strengthen their understanding of the loss. 7, it and assess the need to
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coordinate with the office of international affairs and the risk of innovation as appropriate early in the course of the investigation. my office is committed to following up on all the recommendations made in our report to ensure there are appropriate is an improvement in the operations. we are aware that many improvements have already been undertaken under the direction of chairman shapiro as a result of the findings and any recommendations arising from our investigation. we also understand that enforcement has initiated action and are confident the sec will take the appropriate steps to implement our recommendations and inshore fundamental changes are made in the sec operations. i appreciate the interest the committee has in our report. i think the continued involvement is helpful to strengthen the accountability and effectiveness of the
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commission. thank you. >> thank you very much and i appreciate it very much. let me ask the clerk to put on seven minutes. some of the questions i have, you anticipated in some degree in your comment, but i am going to pursue them in more detail. the sec brought its action against stanford 12 years after the first reports from examiners that he was likely operating a ponzi scheme, a conclusion that examiners are reached on four separate occasions, as senator shall be emphasized his point. i think a good point he made, here you had actual examiner's -- with bernard madoff, there were reports from individuals
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that they thought something was wrong. in this case, here you are having four cases of examiners over a 12-year period making those reports. immediately after, two months after bernard madoff confessed to law-enforcement officials that he was running a ponzi scheme, you ended up with the sec acting. my question -- if bernard madoff had not confessed and raised awareness about ponzi schemes, which this commission have brought this case against stanford? >> [inaudible] >> can you turn your microphone on? >> i think there was a connection. the sec was investigating stanford prior of the bernard madoff investigation. i think the dynamics shifted in the sec when bernard madoff confessed.
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as i talked about in my testimony, it was a feeling of you did not want to bring about a complex case. you might be criticized if you came up with something difficult. because stanford had international issues, it was a more complicated case. when bernard madoff confessed, if you were holding onto a potential ponzi scheme, you would be criticized more for that rather than bringing forward a complicated case. i think it had an impact in that way after many years of the examiners pushing, they finally started investigating in late 2005 it. they were moving forward in the investigation. when bernard madoff hit, they went to the department of justice and essentially said we are going forward. we cannot have a case going on that relates to a ponzi scheme that we are not bringing forward. >> in our opinion, then, in the
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absence of the bernard madoff confession, that we might have gone a long time -- >> i think it would eventually have been brought forward but it was a clear urgency at that point -- >> let me ask you, we know about the troubles are regarding the fort worth office. let me ask you this. do you think the staff could of done more to bring an end to this front? >> this was a matter that was not raised with washington. >> they were not aware of this at all? >> not really, no. the offices are relatively independent. the work on matters themselves. in late 2005 when they finally decided to bring the action -- >> in 1997, 1998, nothing managed to make its way up to the washington office?
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>> no, is no evidence that anyone in washington knew about the examinations that occurred until the former order was made. >> let me go back, if i can come to this point on statistics and easy cases that you pointed out. i am quoting from your report. the institutional influence within the enforcement factored in repeated decisions not to partake in a complete investigation. we found, speaking of your report, senior fort worth officials perceive they were being judged on the number of cases they brought, so-called statistics, and communicated that novel or complex cases where disfavored. as a result, cases like stanford were not considered quick hits or slam dunks. arthur other matters that are showing up nationwide that were
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"novel or more complex cases"? were they not brought because they were too complex and did not fit into the quick hit, slam dunk? it seems to me that this was not a narrow path. it seems like it is a nationwide issue. to what extent have you looked at other offices around the country if there are other matters lingering out there? >> certainly, there was a competition between the regional offices to see who could get the best numbers. the fort worth office is very proud of the fact that their numbers were very high. it was something that was not limited to just fort worth at that time. i think things have changed somewhat and there have been efforts to move away from that. >> what has changed? >> i think there have been efforts made to change that
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perception. for example, to change the valuations of senior officials so they are not evaluated on the number of cases they brought. i think it takes time to change that culture predict you want to show how many cases you brought credi. there was a speech made by a former sec person. major cases are only counted as just one case. there are ways you can bring a lot of little cases and get your number's up. it is a matter of great concern and i think it went beyond the fort worth also. >> you mentioned in march 2010, the recommendations. clearly, -- i hope there will be an examination beyond this.
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i hope we do not have these hearings repeated the when matter surfaced later on. latern it mattermatters surface on. >> we are not aware of any specific cases. it is hard to know of cases that were not brought. >> has anyone been talking to examiners around the country if there were similar problems anywhere else? >> we have had discussions with the new head -- >> what about the old ones? tell me about the old ones. did you have any problems anywhere else around the country? why did we not do that? >> i don't know. i think you could talk -- >> did you ask them if there were other problems like this
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anywhere else in the country that we need to be aware of? >> i think there are some instances but that is something that can be looked at on a broader level. we could interview examiner's all over the country. >> if you are having a bunch of quick hit approches, to what extent were examiner's frustrated around the country with cases that may have involved a lot more damage than the small cases, the quick hits. it seems to me and the context of the damage done it. >> our recommendation was that they considered the amount of investors that were affected. you could have a small matter that affected five investors or a complicated matter that affected 5 million. >> i would like to know the answers from whether or not
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examiners had other areas around the country where they felt frustrated about conclusions they were trying and the reluctance the around the regional office or at the national office to respond to those requests. >> absolutely. >> i have gone over my time. let me turn to senator shelby. >> thank you. why is the sec enforcement division -- you talked about the there were recommendations made in the stanford case on four or five occasions? >> yes. >> was it the atmosphere or the working conditions, as you have indicated, for into metric. how many cases we could have, getting the easy ones, but the
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difficult ones -- that is where the big frauds are. where was the leadership of the enforcement division, not just in fort worth, but at the sec here? are those same people still in its enforcement? >> certainly -- >> and if so, why? >> certainly at fort worth, the head of enforcement and the heads of the fort worth office is very much believe in this approach and they certainly perceived that the enforcement division in washington fought that approach was important. >> they wanted to count how many cases they had and solved but in the scheme of things, they were small cases in comparison to bernard madoff involving
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billions of dollars. were they not competent enough or afraid of something this big? was it leadership from washington? leadership had to come from the sec here to fort worth? >> certainly, the fact that the fort worth office thought it was being graded on how many cases it brought, that came from washington because that is the way they would look at the offices and determine how good of a job they were doing. >> did they look into the substance? with a speeding cases rightly described? in other words, were these statistically minor cases compared to complicated cases? >> i think many of them were very minor cases because it is easier to do it minor ones
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quicker. they did not want to use the resources on stanford because it would take a long time to get a case, so they could have people working on it for a year and not have a statistic to show for it for a year. >> that is no way to do business. >> absolutely. >> what did you say in your report about doing this, instead of substance that they should have gone after? what did you say in your report to the inspector general? >> we said it was inappropriate to act that way and it is not the responsibility of the sec. the responsibility is the protection of investors. the examiners knew they were getting hurt. some of the enforcement folks we talked to said they thought it was a ponzi scheme it. they were sitting there, watching their a potential ponzi scheme go on, but making decisions for their own
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betterment of staff and not looking into it and taking appropriate action. it is outrageous. >> any way you look at it, this is a colossal failure of the sec. this is a colossal failure to do your job. why was the sec set up? to protect investors. so they failed big time in protecting the investor in both the bernard madoff and the current stanford case. in this case, as senator dodd said, and they had all of these warnings from their own staff. >> yes. >> did the people in enforcement at fort worth -- when the examiners recommended things of enforcement, it did the people in its enforcement in the regional area -- when they did not do anything, it did the examiner's take it further up? was there a chain of command
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that they could have brought this up? what the heck is going on here? it is there a coverup? it is obviously gross negligence. >> they did take it up the chain. finally, they were able to convince the enforcement group in fort worth to bring it because there was a new head of enforcement. they went to that person and lobbied. there were memos back and forth. there was a great effort. >> these people that i mentioned, whoever they are, are they still working in enforcement after such a failure like this? if so, why? >> many of the people are different. the head of the fort worth office has changed since then. some of the people are still there. in our report, we recommended
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that the s.e.c. look whether disciplinary action has been taken. >> why are they there? it dumbfounds me as to why these people who failed on one of the biggest frauds in sec history, where they had information, did not pursue it not once, not twice, but four times you were the inspector general and i know you are doing your job, but this looks like the sec failed to the investor, not once, not twice, but four times, big *. so the sec basically broke down in their job in their responsibility? >> yes. >> thank you. >> thank you, mr. chairman. it seems impossible and outrageous that it took eight
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years from the time that possible fraud was identified before the sec spend any energy on in forcing law. the sec's job is to protect the investors. that is their only job. you have got a lot of other peripheral jobs, but they are basically paid to protect the investor. if the investigations, four times, said we have a guy here or a company here who is running what we think is a ponzi scheme -- >> right. >> and i don't care what credit you get from the sec here in washington, your job is to protect the investor. every day that they did not do that, the scandal got bigger.
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it went from hundreds of millions of dollars to approximately $1 billion. we drink more than that in a week appear. -- in a week up here. [laughter] it is so outrageous that the investor has been bilked out of $8 billion because of incompetence -- out of a billion dollars because of incompetence. or they were trying to score points with the sec in washington because of this scheme of metric approach. tell me what is going on. tell me how that happens. >> i agree. in -- our report discusses it. it is our greatest.
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one of the issues in initially that they looked at in deciding not to bring an investigation is that there were no u.s. investors. ironically, had they brought the investigation at any of those stages, they would have been potentially able to stop the fraud. >> or the losing of the money. >> over time, there were u.s. investors. >> people in texas and in louisiana. >> right. they could have made it that there were never u.s. investors. in fact, when they did their examinations and did it necessarily -- and did not take investigative action, the message that investors got was that everything was ok. stanford used that when there would be questions about his returns. he would say or his financial advisers would say that we just
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got a clean bill of health from the sec. the sec would issue these deficiency letters, which are relatively minor, which is also that a lot of folks get from examinations. he would say that if there was any hint at all, they would have stopped. >> one of the troubling part of your report involves the former head of enforcement at the fort worth branch of the sec. he made several important decisions over the years about not pursuing this case. then he left the sec, represented stanford briefly, and tried to represent them over and over again even after being told no on three separate occasions by the sec office of ethics. he told the office of ethics that he did not remember, he did
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not remember, participating in decisions about stanford's case while he was at the sec. are you kidding me? >> it is absolutely stunning. >> that, to me, is criminal negligence. the sooner they get him before a u.s. court, the better i will like it. >> absolutely. >> to allow that to happen -- i almost fell out of my chair when i heard the reasons he gave you for trying to represent stanford. this is a quote from your -- every lawyer in texas and beyond is going to get rich over this case. ok? question mark.
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i hate being on the sidelines. that is the qutoe he gave you? >> yes. >> does that look to you like a little bit of criminal negligence? or something like that? >> i do not want to go into the details, but we have had discussions whether it there will be any criminal action out of that. >> the sec for 13 years have sat on their hands. if you don't get the justice department involved in this, shame on you as the inspector general. >> we have had those discussions. >> we have had those discussions. you mentioned in your testimony
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that his behavior appears to violate state bar rules. can you tell me first whether this issue was referred to the state bar for a possible disciplinary action and if so was referred to the justice department for a possible prosecution or false statements made to the sec office of ethics? >> yes. on both counts, yes. the ethics of this is the one that refers us to the bar. they are in the process of doing so now, and yes, we have had discussions with the department of justice and/or the fbi. >> this is a stunning case, knowing the sec has changed hands and things, that they would jump down this after the bernard madoff case hit the papers. then they released all of the
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documents, trying to say we have one that is not as big. i have gone over my time. it is stunning to me. thank you. >> thank you, senator. >> thank you, mr. chairman. how has the sec responded to your report? >> with those specific recommendations, they have provided information to us explaining how they have attempted to resolve the recommendations. we go to a very rigorous process where we review what they provide. we are in the process of looking at their responses. in most cases, we think they are sufficient. in a couple of cases, we have gone back and ask them for more information. they have been responsive to this report. >> can you be more specific about the areas where you think they did not provide enough information or are there areas that that have not been
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addressed to your satisfaction to date? >> shore. the first issue we are looking at is to talk about the focus on potential harm to investors, that that be something that is a clear factor that always litigation risk. when you have a situation where there is some dedication risk, but on the other side you have clear hard to investors, you have to the value the hard to investors over the potential dedication risk. that is one where they have made some changes. we would like more clarity in the policies and procedures, that the harm it to investors could outweigh litigation risk. even if you are going to lose if there are significant investors involved. if you brought a case and you believe legitimately that there was a ponzi scheme, the
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investment community would be aware of it so even if there was a possibility that you would lose, nevertheless, it would be a benefit. there are certain clarifying procedures that they have showed us that we are asking more information about when we look at these responses to our recommendations, we are very careful and it tough to make sure they respond in all ways. i am happy they have come >> on the issues of the bottom information getting to the top, both the state security board in the 2003, according to your report, and the fort worth regional office starting in 1997 had raised flags.
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how did you feel the response was to the procedures at the sec in washington to address both the state security board and the regional office had given notice. it closed at the fort worth regional office. it closed four separate examinations according to your report that were started and the state security board in 2003. 1997, ok. how do you feel about the response of the sec in ensuring that information gets back from the lower level yellow flag, if not red, to washington? >> that was a concern and something we tried to address on recommendation. the lower-level people and even some higher level people in fort worth appealed to the
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enforcement people that there was not a mechanism for them to go back to washington and had the head of the program go to the head of the enforcement program and say we have a big problem in fort worth. they are taking appropriate action. they felt comfortable on the within the independent office. the need -- there needs to be better cooperation so that the examiners can go all the way to the top, as far as they can go, to say, "here is what is happening on our office. they are too focused on statistics." it is a problem that has grown. they made great efforts in fort worth, but there needs to be an effort where they can go beyond and potentially get washington's support for their concerns. >> but you do not see that connecting yet? >> there are putting in policies and procedures to reflect that. our view it is a good thing. we need to make sure that they work appropriately.
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it is well and good to put in new procedures and that is really all you can do now. we need to make sure that it works well in this actual case. as these procedures are put in, we will test them and got them to make sure they are actually doing the job they are supposed to be doing. >> what about in the area of respect, coordination, credibility of the state boards. in this case, the state security board was the first to bring it up. in your investigation, did you see that there was respect for state security boards? what other states call them, i do not know. is that something that needs to be addressed more carefully as well? >> yes, that was one of our recommendations. first of all, there were referrals from the state security board to the sec which they ignored.
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a complete cam -- came into the sec which involved the stamford matter. it was obvious the complicated involving jurisdiction. they referred to the state securities board. but the sec with their resources is not able to take a case that involves overseas issues, a small texas state security court could not. one recommendation is to promulgate specific procedures on that. the incentive to the texas state security board needs to do something. they did not want to take the case because it was complicated. at the sec will not take it, the texas state security board will not be able to do it. they need to take those things seriously. that is one of the specific issues that we addressed in our recommendations. >> what about the response to that point? >> again, they had told us that they will promulgate these procedures to deal with these
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issues. we have not seen these yet. we will give them some time to put them together. we are on the right track, but that is one that we have not finally closed. >> thank you, mr. chairman. >> thank you mr. chairman. thank you, mr. kotz, for your work. what was the sec official working for stanford? >> he was the director of enforcement for the fort worth office. >> he was the director of enforcement for fort worth? >> yes. >> what involvement did he have in the stanford matter as it was passed over for enforcement over and over again? >> as i said, initially, they opened this under inquiry which was a prelude to investigation. he made the decision to close
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it. there were also complaints that he review. he pretends faded and the decisions refer complaints to the texas state securities board as opposed to take the action to the sec. >> it is clear from your investigation that he made the decision to close the matter at that time in 1998. >> that is what we found. >> he claims he does not remember any involvement. >> at the time that he went back to the sec ethics office to try to represent stanford, he claimed he did not remember involvement. when we interviewed him, he came back and certainly remembered some involvement and we discussed that he was involved in those decisions. he told us about this issue with stats. he explained that was when he was looking at. a lot of the information did come from him. when we interviewed him, he recollected that he did have some involvement. >> have you or any others
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investigated whether he had conversations while he was at the sec with stanford about future employment? >> there was no evidence of that. as i indicated, there are follow-up efforts we're doing in cannot -- in conjunction with other authorities who will be looking at those issues as well. >> i want to go to senator hutchison's question about the reaction to your report. how would you grade their reaction so far about becoming much less of a statistics driven culture? >> as i said, i think the intention is there. chairman shapiro -- schapiro has proven some leadership on this issue. i do not know if it is necessarily taken. it takes time for a culture to change. the clear message from the top is we are no longer focused on stats. we are focusing on in court
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cases. i think there have been some examples of that. when we need to make sure is that trickles down the line. >> about when could we expect your written analysis about how adequate or inadequate the sec's reaction to your specific recommendations are? >> i think we will need to give them one year or two potentially after the procedures are in place to figure out if they are actually working. in that timeframe or shortly thereafter, we need to figure out if there are paper procedures or if there are having an impact. >> before that, could we get a report on what paper procedures they are at least saying they will implement to address this? >> absolutely. >> you issued your report to chairwoman schapiro on march 31.
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it was not released to the public until three weeks later. the specific today the sec charged goldman sachs with fraud which was a bit of a news story. do you personally consider the timing coincidental? >> that is a matter we are, in some measure, looking into. we have requested to look into specifically the timing of the goldman case. there were allegations made that the timing was related to financial regulatory reform. there are other allegations about the timing. that is a matter we are looking at and investigating right now. we have not concluded the investigation so it is hard for me to give a full answer. i will tell you that they are almost finished with that investigation and should be completed within a couple of weeks. it was outlined the broad issue of what led the sec to file the
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goldman case the day they did and whether it was related to any other factors such as regulatory form, the stanford case, etc. >> that is important. i am not asking about the timing of the goldman case but the timing of the release of your report the day the goldman case was made public in terms of the fraud charges. based on what you know, do you think the timing of the release of your report was coincidental? >> certainly, it would strain credulity. we have a process that we go through when we look at these matters. it was certainly suspicious that the day our report was finally issued it was the same day as the goldman action.
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however, i would say that there was a process for our report was redacted. it was a process we were involved in that took some time. it was not suspicious, perce, that it took a few weeks after -- the report. the particular timing with the goldman case is certainly something worth looking into i cannot give you a conclusion right now. i would certainly say it is suspicious. >> final question about the sec proxy reaction about all of this. who at the sec has been fired or demoted because of this gross mismanagement of the stanford case? >> i have not been informed that anyone has. >> thank you. thank you, mr. chairman. >> thank you. before turning to my colleague from tennessee, i want to make a point. i asked that their reports of
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the three months from the sec since the bernie madoff case. we have received one on the progress being made. again, i will not be here, but others will be. this committee is going to want to follow this. i raise the same question. it is important the committee be kept abreast of exactly what is happening with the recommendations on these matters. if you could -- >> absolutely. this committee's involvement is crucial to ensuring that there be improvements. >> and the promise, the commitment was made. the question i specifically raised was every three months. >> i think my questions have done a very good job. since you did mention the goldman report, that will be made public in two weeks.
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is that correct? >> the process we have come and this is not in our control, investigative reports are internal and then there can be requests made to make things public and there is a process where the sec reviews, reid? come and issues it. -- reviews, redacts, and issues. as far as how long it will take for them to release the report, that is not something i have control over. >> i will wait for the second panel. >> let me emphasize, but i want to underscore the point raised by senator bonding. i was going to raise the question myself. with the head of the enforcement division, this issue of them going off and try to represent the matter here. you did spend a whole day just on that issue alone. it is stunning to me in many ways. it looks like it was very much a
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part of the problem from what i am hearing. i would like to request, if i may, this issue. i have a tendency to believe that these are not one of matters. is a national policy, or a commission policy, to get the quick stats. it was not just focused on the fort worth office. to what extent are you looking at other offices around the country as to whether or not a similar conflict emerged? there was a report in "the washington post" a few days or weeks ago now. i have the question here. the problem still persists. this was in june, "the washington post" reported that the sec for worth office changed how they performed in and this "open up a rift between fort
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worth management and staff that continues today undercutting efforts sec leaders in washington to build the agency and promote coordination after years of setbacks according to current and former sec officials and internal agency documents including three separate reports by the sec proxy inspector general -- sec's inspector general." managerial problems mckim obstacle to reform was the title. can you comment on this? is this still a problem in this office? >> we have issued other investigative reports about the fort worth office where we found concerns. i cannot know if i would go so far as the article, but certainly in other cases we have found situations where people had spoken around him. when they spoke out, they were disciplined. we issued reports recommending that action be taken against
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them who engage in that. we have issued more than our fair share of investigative reports regarding the fort worth office. >> is an ongoing? >> we look a particular issues. those issues are resolved by our investigation. it is hard to know what else is going on. we have information and we look into it. these other investigations were involving matters that were relatively recent on like the stanford matter where most of the time was many years ago. these were relatively recent. there may very well be a -- >> let me do this. first of all, i would like to get, as soon as you can, and you could possibly do this in a written form to the committee, i would like to would know whether or not there are ongoing problems with in that office regarding conflicts between the enforcement division as well as the examination division. at this is an ongoing problem in
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that office, on want to know why and what is being done at the national level to correct it. two, whether or not we are looking at other offices regionally to determine during this time were the approach was being taken, were other matters being reported to enforce or actions were not being taken that we ought to be aware of. >> absolutely, sir. >> let me get one thing straight. you are the inspector general for the sec. correct? >> yes. >> are you in depended? >> yes. >> then why you submit your reports to the sec said they can react -- redact anything to prevent the public and our committee from knowing exactly what you said in the report? >> this is not my decision.
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-- >> no. why is it your decision to report to the sec and not to the public which you have an obligation to do. >> the concern is that there may be non-public information in the reports that i write. >> that is said to you. >> listen. i have had inspector general's before this committee before and they did not report to their specific agency. they reported to us. you telling us that you report to the sec and they can redact specific things so we never get to see them? our office -- >> our office does not have the authority to make decisions on
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non-public information. if there is a concern about non- public information it goes to the commission. we are involved in the process to try and ensure that the information redacted is limited. >> you need a change in the law then? you have the authority to issue your report as you see fit. i thought that is what all inspector general's had the authority to do. you do not have that authority. >> yes. i would welcome that. >> thank you. unless there are more questions, i would move to the second panel. i will the the record open and you may have some additional questions. for those who could not be here this morning, i presume they want to raise questions with you as well so we will need the record open. i appreciate the work you are trying to do. i do not think our lines of questioning is specifically
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questioning year. it seems to me the inspector general is spending time on the issue of fort worth. i do now to find out later as i am sitting somewhere and reading about hearings because there were problems in other offices about -- around the country. >> i appreciate your joining us with here. come on up and join us here. thank you very much. asked use it in the middle. very good. thank you. i'll begin in the order that i introduced you. please keep your remarks to about five minutes if you cancer we can jump right in for the questions. your false statements and any data, material and you think would be worthwhile for the committee to look at we will
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include certainly in the record as well think you. >> thank you, members of the committee, for the opportunity to before you today. we commend the work of the -- inspector general in the depths and analysis of the airport. they conducted an extensive investigation. we cannot evade responsibility for the handling of the stanford matter in the regret our ability to work more clearly to limit the investor losses suffered in the case. we're doing three things to respond directly to the case and the ig's recommendation. we are vigorously pursuing stanford and other involved in misconduct in trying to reclaim as much money as possible. we are raising our recommendations that the inspector general proposed. we are continuing what started prior to the report by mr.
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diflorio and i to implement the structures and processes to make sure this does not happen again. he knew about the details of the filing of the stanford case. with respect to the recommendations, we are doing a number of things including revising metrics used to manage and evaluate the performance of the division and clarifying the procedures with respect to coordination between the enforcement division that underlie some of the matters in the stanford case. third, with both conducted a review over the last 18 months. it has been described as the most significant restructuring in over 30 years. that includes a new training, market and private sector expertise, streamlined management, putting more attorneys back on the front line, improving risk assessment techniques, new initiatives, and
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most importantly perhaps, totally revamping the way we have -- the way we handle our tips, complex, and referrals. we're doing new initiatives watching specialized units focused on particular areas of the law, conduct, or transaction which is particularly relevant to stanford including bigger bosons segment -- advisers. we are looking at investment techniques we can look at problems early on, identify red flags and move more quickly. much more needs to be done. as was mentioned earlier, our mission of investor protection demands nothing short of a full commitment to do all that we can to minimize the chance that another stanford happens and we did not act as promptly as possible. i will turn it on -- turn it over to mr. diflorio. >> the inspector general's
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recommendations identify the need for better coordination between the enforcement program and the exam program. we're committed to doing just that. policy enforcement are working together on multiple fronts to identify misconduct earlier and move to shut down more rapidly. we have introduced a joint committees to try interactively evaluate potential referrals and new government processes of justice. we've overtaken a top to bottom review of our strategies, structure, people, processes, and our technology. in each of these critical areas we are breaking down silos and implementing significant new reforms to better protect investors. in conclusion, we are both committed to reforms that address the kind of issues that led to this case. we would be happy to respond to any questions you might have. thank you. >> ms. romero. >> thank you for the opportunity
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to testify today about the reforms the fort worth regional office is making in response to the issues raised in the inspector general's report. i regret that the sec failed to act more quickly to limit investor losses suffered by the stanford victims. all of us at the sec share responsibility for the handling of this matter. we're taking significant steps to ensure that we implement the needed reforms. mr. khuzami has summarized the current litigation. i want to summarize a few points. my staff worked closely with the justice department to ensure that response will executives of the of stanford company were brought to justice. we aggressively continue our investigation aided by access
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to standard furniture records and other key documents obtained by the receiver. in particular, my staff that a significant role in insuring the cooperation of james davis, their chief financial officer. we also developed critical evidence in support of the allegations have that leroy king conspired with stanford and instructed the efforts to investigate stanford armani years. we have recently notified several former stanford executives that we intend to recommend fraud charges against them. these persons include former high-level executives and financial advisers. our investigations of these matters is continuing and i have directed my staff to determine if others as stanford were involved in fraudulent conduct. over the course of the past 12 months we have collected and reviewed tens of thousands of documents, email indications of more than 150 former and
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employees in taken sworn statements of more than 60 former employees and witnesses. we have interviewed approximately 200 victims of the stanford fraud. we have worked with the victims coalition together relevant information and evidence to further this important investigation. since filing the case, would work to minimize receivership expenses and make sure is focused on investor recovery. as a result of our efforts, the receiver redo to reduce rates by 20% in the court, at our request has held back additional 20% of the fees and expenses. we continue to monitor the work closely. the initiatives outlined in the remarks of mr. khuzami and mr. diflorio are making a significant impact on the staff. in this fiscal year alone, investigations for the fort worth regional office have
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resulted in criminal charges against 14 individuals and many members of our staff serve as specials -- special federal prosecutors in the securities area. the fort worth staff has filed 19 emergency actions in federal court preserving millions of dollars for investors. during the past four years, the fort worth regional office has worked to bridge the gap between broker-dealer and investment- adviser programs. in late 2006, it was clear to me that we could not adequately oversee an increasingly integrated registration population unless we bring all the skills and expertise to a firm of's business activity whether a firm or brokerage. another top priority has been to enhance cooperation and teamwork among enforcement programs. the success of this initiative is demonstrated by the fact
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that the number of enforcement cases stemming from examination referrals and information has increased from 12% in the fiscal year 2005 to 35% in the fiscal year 2009. in conclusion, while i believe our efforts have enhanced the commission's ability to protect investors, we will not forget the and the lessons taught to west by past mistakes. the fort worth regional office is dedicated to protecting investors. i think for the opportunity to appear before you today. i would be pleased to answer your questions. >> thank you all very much. let me begin by thanking you all for the work you are trying to do. i realize this is in addition to stay on top of all of the other matters occurring. from my standpoint, i want to know my line of questioning here is not to reflect the work you are trying to do. you are all new hires in these
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matters. again, i appreciate your efforts going back over the time. i raised this earlier. we and last for progress reports fourth -- from the committee in the past. we have had one report in the last five months. i made the request back then on behalf of the committee and make it again that this committee will want to be informed. i guarantee it in my absence, senator shelby will want to be informed and other members of this committee. i made that request. we would like to remain posted on personnel actions being taken as a result of the sec staff. i think this may have been talked about already.
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it is not our business to hire and fire people at the sec. people may have left, but it is hard to understand that people have not been fired. billions have been lost and lives have been routed. i'd like to be kept informed if i can. senator shall we made a good point in his opening statement in the drawing a distinction between the madoff case and this one. there were reports coming which she felt were very important matters that the madoff scheme was clearly a ponzi scheme. that was a knowledgeable outsider. in this case, you have and an examination office and
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enforcement division saying the fire is too complex and we need to respond to other matters here. this is a different set. you talk about the perfect storm talking about the perfect storm about bernie madoff. harvey described this one. what is your quick analysis of what went wrong here are senator, in this case, the people in fort worth were focused on the issue as to whether or not this was a ponzi scheme. it was not like bernie madoff were there were trying to figure out the strategy he was operating was really upon the scheme or not. the discussion and debate within the office was going on. there was not, in my view, significant follow-up to get as much evidence as we could.
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but not proceed with a full- blown case so that we may have been able to start the process of alerting the world that they were involved. sometimes that is easier said than done. we have to have a missile -- admissible evidence to show there was a violation of law. my sense is we did not do as good as a job. we were not as creative as we should be to figure out with the narrow leave tailored case was even if we had a significant risk of loss. going in and losing a case is not a great thing. if you do that, one thing that can happen is the perpetrators of fraud can use that as a good housekeeping seal of paper will saying they try to stop us and we rejected the claim. you have to be a little
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concerned about that. when you have high returns and a lack of volatility, as a savior, i wish we had gone in with a narrower theory or a failure to disclose commissions or some other theory. >> is a common place where you have this kind of debate? this is four instances over 12 years. no one has indicated there was a discussion. they come by four different times. is this common place where you have that happen? i can understand one, but four times in a time of 12 years? >> it would not happen today. there is more immediate decision making. the focus as i read the report is whether they had the admissible proof.
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is that they they wanted and needed a level of proof. >> this is more like a question of this is a stats approach. secondly, had the madoff matter not come forward as it had, i am not sure any action would have been taken. >> -- a hard look at everything to make sure they are operating appropriately. the economy soured and it became more difficult to keep a ponzi scheme afloat. more people were demanding information.
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>> would you answer the question i asked with respect to the inspector general. looking at other offices with that approach of the quick fix his stats number and other matters that may have been messed to possess a greater rest -- risk. >> more importantly, i am not telling the rank-and-file that quick hits and numbers are would derive the division. countrywide, goldman, evergreen, i cp, citigroup, bank of america, these are huge fraud cases in. we are not getting quicksteps, i assure you. even during the 2000 proxy, if you look at the history, auction
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rate securities, research analysts, and ron, world,, there are plenty of examples of difficult cases. i will not save one of this is more focused on the stat. is not the standard today, i assure you. >> thank you, mr. chairman. mr. khuzami, what actions were taken to discipline employees who were responsible for the mishandling of this case? >> the process is under way. we have to follow certain procedures by regulation and otherwise. it is under way. >> 1997. for the present time. that is 13 years. you have not had enough of a chance to accumulate evidence?
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>> the process commenced after the release of the inspector general's report which is what we are falling to review the information gathered by the inspector general to make the appropriate decision. the inspector general reported five weeks ago about insider trading. what has happened to that report? >> i am not familiar with that matter but i would happy to get back to you with information. >> you do not know anything about that report? it is by the inspector general, the gentleman who was just here, on insider trading. he submitted a report five weeks ago. >> i am not familiar with that matter, senator. >> who at the sec would be? >> i will find out when i return to the office and will respond to your question.
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ok. five weeks is a pretty good time to be able to reach a record, redact the things that should not be made public, and we would like to know. that is insider trading which affect a lot of investors. if you bought tyco industries during that time or during the past years and you had somebody that was doing in cider trading, it surely affected your holdings. does the office of compliance inspections and examinations bear any responsibility for the spectacular failure in this case? should the majority of the blame falls on the enforcement division? >> i think the inspector
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general's report laid out the facts. we both have responsibility to make sure that we address the inspector general's recommendations. one recommendation was that the enforcement and examination work closely together. >> how about washington and fort worth? >> correct. likewise. we look at those programs, national and regional basis. we now have governments mechanism, escalation protocols come and join initiatives within divisions and regions to make sure things like this cannot happen in the future. >> do you know how much money this would cost our investment public if you take the one in the east than the one in taxes? >> yes, senator.
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>> $58 billion. give or take a few billion here and a few billion there. do you know how long it takes for people to save $58 billion. we can print in up here. and is different for the government, but individual investors trying to preserve their capital and getting taken by crux? i think the sec better be capable of better things. >> senator, we have implemented a number of reforms -- >> the chairman of this committee has tried to influence others how important it is to protect the investor. that is the sec proxy job. i worked in that business for 30 years.
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if i messed up, the sec was there to tell me. they should be there to do it better than they are doing it right now. >> absolutely, senator. >> thank you. >> senator hutchinson? >> thank you, mr. chairman. many of the victims of this ponzi scheme and this appropriation of funds. they are seeking some kind of help when they come to our office. they have fallen through the crack, in a way, because there is really nothing there for them. one of the issues that have raised is that the sec has refused, i guess in late 2009, they filed a civil suit but they
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did not go further and seek bankruptcy. they believe this would give the bankruptcy judge more authority to go after assets. we are trying to go after assets. why did the sec never initiate bankruptcy proceedings in an effort to try to give a all assets to the bankruptcy judge and availability for the victims? mr. khuzami. >> i the guy will defer to -- i think i will defer to ms. romero. >> the court was approached with that idea, whether or not the stanford receivership should
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beacons -- converted into a bankruptcy at that stage. the sec came in and we disagreed with the investors who were wanting to take it to a bankruptcy. in our analysis, it would have cost the estate in a lot more money. the court had a different view. when he did was he appointed an investor committee that would serve much like a bankruptcy or a creditor's committee. it would not cost the state any money. in other words, they are not going to be able to charge the state any money where you would in a bankruptcy setting. this was announced a couple of weeks ago. we supported that effort. it is going to give -- they will
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have a closer working relationship and more say in the work -- in the receivership and they have had recently. the examiner they reported is also part of that committee. we expect that will help return more money to investors. >> i did not understand what you meant by "cost of the state more money if they did not go through bankruptcy than where they are now with receivership." >> at the state where we were when the bigger of the issue came forward, there would have been costs in terms of creditors that would have had claims perhaps in a bankruptcy setting that they do not have in a receivership. that meant the money we have would have been even thinner. exactly. given that it was our view that
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this investor committee, which serves like a creditor committee, would give this same type of control, if you will, if it were in the bankruptcy but without the cost. >> as regional director, i assume that you are given the sec authority here. your view is that the assets are being protected to the maximum for the victims at this time? >> we have worked very hard over the past 18 months to make sure that the assets are protected, every dollar, for investors. we have taken a number of steps to do that. we continue to oversee the receivership activities. we continue to work with the justice department, the office
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of international affairs, and regulators throughout the world, quite frankly, to make sure that the assets we have had frozen in these different jurisdictions are remaining there until they are repatriated here to the u.s. for investor benefits. >> one of the complaints of the victims has been the time that it has taken from even assets that were owned by the victims and not owned by the company were frozen for so long and people could not get access. let me ask you two things. how much longer will it be before frozen assets will be able to be distributed that have not already been? i know some have. i realize that there are different types of investments and you cannot make a blanket estimate, but in the area that
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you can, how much can victims count on or have some expectation of being returned, not the assets that lonnie to the victims, but the assets under management that will be distributed? what will be the timetable? what will the expectation be? >> as to the timetable, but there are, like i said, assets from stanford all over the world that have been secured. hopefully they will be repatriated as soon. in order to procure those, particularly in europe, the department of justice took the lead there so the determination of when we get them back and
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when we can get them in investor hands will be made in the criminal case. we have to wait for a conviction. that is set right now for january of this coming year. hopefully once there is a conviction in that case, that is why getting the conviction in that case is still important. a lot of this money is tied up in that. we expect some time after that we would begin the process of distributing this to investors. >> i know i am over my time, but any type of percentage that people can expect? >> it is hard for me to predict that at this point in time. the receiver is working hard to gather assets. like i said, it is ongoing for coming in example, south america. we cannot predict how much money
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we will be able to recover their. it is hard for me to say. after recovering a claims process, we can better determine how many victims will be making claims. then we will have the calculations which is a long and arduous process. i'm sorry i did not have specific numbers for you at this time. >> thank you, mr. chairman. >> thank you, mr. chairman. i will continue with ms. romero. what is your full title in general responsibility? >> i in the regional director for the fort worth regional office. i am charged with overseeing the examination program and the enforcement program in the fort worth office for the sec. >> how long have you been in that particular position? >> i started in march 2006. >> were you at the sec
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previously? >> i was a federal prosecutor for 16 years prior to coming to the sec. >> ok. you testified at our field hearing in august 2009 in the back and rich. i appreciate that. you are in the same role. -- august 2009 in baton ro uge. when did you begin to formally or informally looked into stand for? >> formally it began in august 2006. >> what about informal? >> there was an informal inquiry, which is [unintelligible] it was opened in 2005. i believe it was late 2005. >> and that was the first time the sec investigated stanford? >> no. the answer of whether it was a
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formal or informal given that our terms of art. the formal investigation began october 26, 2006, and the informal in late 2005. i do not know the exact dates. >> one was the first investigation into stand for? >> as you know, i came in 2006. from what i have reviewed, the sec was looking at stanford back in 1997. >> 1997? >> yes. >> how would you describe that activity? >> it was mine understanding that the examination program does periodic exams of various firms in the region. did quarterthey examinations between 1997-2006. >> that is not an investigation, even an informal? >> no, sir.
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>> the name of that division is? >> the name of the examination? they are called the office of compliance and examination. >> compliance, inspections, and investigation -- and examinations but they did not investigate in any way? >> no, sir. they examine books and records of different firms. they do not investigate. >> the reason i ask, and i know you are aware of this, i asked about this in baton rouge. apparently i did not lawyer up enough. when did the sec formally began an investigation and exactly what provoked that. you responded, "we began a formal investigation -- well,
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there was an informal investigation in 2004, then the formal investigation. that is where we asked for the authority to issue a subpoena in early 2006. were you aware that significant activity of inspecting happened well prior to that? >> yes, i was aware at the time that significant inspection activity had happened. i was truthfully and candidly answer your question as to when the investigations began and what provoked them. i noted in my answer that several things promoted the investigation including tips and complaints. that said, if my answer created any confusion for you or yourself, i sincerely apologize. >> in your testimony also said,
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"i think we had four tips and complaints, some anonymous, questioning the legality. we followed up on all the tips which led to our informal and formal investigation." that summary seems to leave out something for the significant. but you just did not have tips and complaints from the outside. you had instance after instance after instance of your own enforcement -- excuse me, what is the name of the division? >> examination. >> examination division saying it was a big problem. any reason you did not put that in the summary? that is different than an outside on certain tip. >> as i told you, senator, in 2009, there were several things that provoked the informal and
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formal investigation of stanford in 2006. some of those things were the tips and complaints received by our office. i also noted in my answer that there were other factors and i am fully prepared to discuss those in the hearing. >> did you describe those from that division? >> did you come in fact, go and to all of the activity within the sec itself starting in 1997? >> i did not. >> you were open to that but did not go into it? >> i was prepared to. i was answering your specific question. if i created confusion, i apologize, but i was answering your specific question. >> what was the preparation you undertook before that testimony? did you prepare your testimony in the consultation with people
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that the sec? >> yes, i did. >> who were they? >> members of the stanford team to get the facts down about the case. where we were, getting a bit down the investigation. >> in the washington office, did that preparation include -- cracks in washington, there was preparation regarding written submission. >> who was involved? >> i am trying to think. there were a number of people involved. norstrom general counsel, lawyers from the chairman's office, lawyers from the division of enforcement. as i sit here, i cannot think of everybody's names. i would be happy to send that to you. >> do you remember as part of that britain time lines being put together -- as part of that having written time lines?
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do you remember putting together written time lines regarding sec activity about stanford? >> the day that we filed the stanford case on february 16, 2009, we began to put together a detailed chronology of the stanford defense beginning in 1997. >> do you remember putting together a chronology specifically in preparation for your testimony? >> no, sir. >> you do not remember that being distributed and discussed by e-mail? >> i do not. >> you do not remember the original chronology put together to help you prepare for your testimony starting in 1997? >> i remember we did a chronology the dave we filed the stanford case. >> i am speaking specifically in preparation for your testimony.
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>> i do not remember that. i do not recall. >> you do not remember as that was looked at in preparation that the chronology was changed to start around 2004. >> i do not remember that. >> you do not remember that the revised chronology is what you testified about? >> no, sir. >> in the same vein, the remember an sec meeting with you prior to your testimony or the chairman said, "any disclosure that is made now is meant to be quite narrow and is not meant to expose the agency." >> no, sir, i did not participate in a closed commission meeting. >> i did not remember if that was close or not. >> do you remember a commission
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meeting? >> no. >> do you not remember that "in relation? >> not to stanford or any other case. >> there is a lot of background to this. the bottom line, which i am obviously going toward, is that you actively misled me and the committee. >> i am not saying i could have been more careful in devising my question. shame on me. i am a recovering lawyer. i am saying you actively misled me and the committee. it to you have a response? >> i did not actively mislead you, senator. i have dedicated my life to the public good. i am a four-year veteran of the armed services. i served as a police officer in the city of fort worth for four years.
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i served as an assistant a district attorney. i went to the fort worth -- i'm sorry. to the u.s. attorney's office in the northern district where i served for 16 years. i have earned and high enjoyed the deepest respect. that includes with members of the the circuit, and my integrity has never been questioned. i make mistakes. i am human, and i am getting old. if that happened, i apologized. i am prepared in this forum, or in any other briefing, to go into full detail about the matter as i know it. i did not then, and i am not now
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misleading you in any way, nor do i have any reason to. i was not there before 2006. >> you laid out a timeline in our field hearing in august of 2009 that started in 2004. the ftc's direct knowledge of all of these problems started seven years before that. would you disagree? >> i would not. >> was that it hit a mission? >> i was entering a specific question, and i am sorry. i was prepared to go into all of that. we moved on, and as i read the transcript, i saw that. i apologize. i am prepared to brief you in any form that you would like and go through the matter detail by detail. i think it will be important and
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constructive to look at the preparation that went on at the washington office with you and others, directly preparing your testimony, and specific discussion about the timeline, and specific discussion about answering everything absolutely as narrowly as possible, using every opportunity to shorten the time line as much as possible. that will be a continuing focus of mine. that is there. that is in e-mails. that is in writing. that is part of the travesty of this entire case. thank you, mr. chairman. >> thank you very much. let me thank our witnesses. i will leave the record open for a number of days for additional questions. i want to end where i began. i have respect for the work that people to the cftc.
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this is hard work. -- at the ftc. this is hard work. in our financial reform bill, which called for doubling of the budget of the sec. -- we call for a doubling of the budget of the sec. my hope is that additional resource capacity will provide additional staff. a lot more work we will ask you to do will be a result of the financial reform bill itself. i wanted to make the record that we were in acknowledging the problems. you are all new to this. it falls in your lap to weave our way through this to get right answers. there will be crises again. there will be problems that get >>, somehow. it is a human endeavor.
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we ought to be some -- able to set up a way to resolve that in a way that does not leave a gaping hole and tremendous damage to some many people. i thank you again. >> thank you. >> thank you. >> taking a look at our schedule today, next our financial programming continues with testimony from treasury secretary timothy geithner on the state of the global financial system. later, remarks from federal reserve chairman ben bernanke, on the 2008 financial crisis, and the current u.s. economy. then, we will head to the united nations to hear speeches from president obama. >> every weekend on c-span3 experience american history tv.
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48 hours of people and events telling the american story. visit museums, historical sites, and college campuses as top professors and leading historians and delve into america's past. it is all we can, every weekend on c-span3. >> i really underestimated how big the jobless. i had been the republican minority whip. i jumped from minority whip to speaker overnight, and from a minority party then no one thought was coined to begin power, to lead a wave of 9 million additional votes in 1994. >> newt gingrich and his tenure as house speaker, the state of american politics today, and a possible presidential bid in 2012. sunday, on c-span. >> you do not get to choose the
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moment when the opportunity to shape your country comes your way. all you get to choose is what you do when it does. >> the british deputy prime minister defends his decision to form a coalition government. sunday night, 9:00 p.m. on c- span. >> now, testimony from treasury secretary timothy geithner on the state of the global financial system. he addressed the implications of the new global financial standards, as well as the economic fx of the new financial regulation bill, known as the dodd-frank act. this is two hours and 20 minutes.
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>> the hearing will convene. i, again, and explained, not apologize because it was not my decision -- we had scheduled this hearing, and the minority pointed out the statutory requirement to have it. we have not lived up to that. i appreciate them making it clear. they are correct. the hearing had been scheduled on the assumption that we would be voting last night, and a full complement of members would be here. so, just as i acknowledged to the head of the fha this morning, our witness mr. secretary treasury is testifying to fewer members than the norm. i say that as an explanation, not an apology. first of all, it is not anything we apologize for because we have not done it. secondly, i have yet to meet the administration witness who minded that people were not here. we are more often asked to apologize for the people who are here. we can still proceed.
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that will mean we can go -- it may not seem like a lot of time. we can shoot for six and a half minutes, maybe seven. we do not have to hold strictly to the five, which can be a constraint. now, let me begin my opening statement. i welcome secretary geithner. i think he comes to us, in general, with a very successful record. we had a situation in the economy when he, and the administration, took office was in terrible shape. we had a very deep recession. we have become the process of emerging, more slowly than anyone would like to come up for a variety of reasons, and we will debate those reasons, but in the economic area, we have been making some progress. we are particularly here today to talk about the international area. this committee has jurisdiction over that in a number of ways, including what is often our jurisdiction with american relations with international institutions. let me begin with that. we have a crisis earlier this year.
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-- we had a crisis earlier this year. we did not have one, europe had a crisis. if you look at the trajectory of economic recovery, the first slowdown in the pace of recovery is coincidental with, and, i think, caused by the problem in europe. it was the greek debt crisis that really caused the first glitch, and we have not fully recovered from that. europe threatened with a significant set of problems. what happened was there was a european-coordinated response, in which we participated, and, in which we can take a little bit of pride because much of what was done to respond to the greek debt crisis and its implications, built on what we did in 2008-2009, the joint efforts of the bush administration and this congress, and carried out by the obama administration.
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people have become more bitter and angrier. but, the event from september, 2008, too early 2009, one of the most important bipartisan efforts in u.s. history. with republican and democratic leadership in both houses, first the bush administration, then the obama administration collaborating on a set of policies that were not popular, and successful. in fact, much of europe built on that. i know there were criticisms of the global international monetary fund. i think events have now shown that our ability to work with the international monetary fund cost us not a single penny of our tax dollars, and was, in fact, helpful in containing what could have been a serious problem. although, it was serious enough to be one of the reasons for the slowdown of growth, i think. the second issue is coordination. i have been pleased to read articles in "the financial times," "the new york times," saying that yes, basel is a good thing, but it deals only
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with the banking industry in the technical sense, and there is the whole non-banking financial industry, where the problems were. recently, a column in "new york times," a column in the "financial times," they said the only country s step up to deal in a serious way with the non- bank issue is the united states, with our financial reform bill. we also know that having simply us do it does not work. as i said before, a justification was cooked up "socialism in one country," to explain why marx's prediction that the whole world would fall to them did not come up. that did not work very well, socialism in one country, but regulation would work even less well, because we have a total fungibility of activity and money. so, what is very important is for us to work together. i'm very proud that we work very closely with the europeans, the australians, the japanese, the english, who were somewhat separate from the europeans here, the canadians, and i
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think we made very real progress in pulling things together. we have also been willing to assert our role to defend americans' economic interest. we have an ongoing situation where we intervened with the european parliament and the european union, where they were talking about rules that would have discriminated against american hedge funds. we have had some progress there. what we will expect the secretary to do is talk about our progress there. i want to reiterate the importance of the provision that was fully supported by the administration. in the bill that was signed into law in july, there is a mandate to the federal reserve and the treasury to take defensive action against any nation, anywhere, that lets its financial system and a legal system be used as a way to bypass our regulation. we are very serious about that. unfortunately, we have the experience in that.
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there was a holdover from the previous administration to this one, good experience with the sanctions regime, and how you deal with wrote nation -- rogue nations, and the experience we have had in being tough there, we expect to be applied if any nation holds itself out as the haven. the gentleman from alabama. >> holding this hearing. america is the largest economy in the world. it is actually larger than our 3 next competitors. we got there through choice, competition, and freedom. not by the government running everything. when you go to other countries, you come back to the united states, and you know america, ultimately, will be ok. we will have a sound economy. we may have challenges, but we will confront them, and we will beat them. a famous investor once said i can make money no matter what the rules are, i just need to know what rules are.
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this recession, which was brought by wall street excesses' and government incompetence, the american people have not pass for a bailout, special favors, or more government programs. they certainly have not been clamoring for higher taxes. they have asked for two things -- for the government to stop making things worse, and for some seven -- some semblance of economic certainty. they need to know what the will start. instead, what we have been given -- the need to know what rules are. instead, what we have been given is a bloated bureaucracy, more government control, and still more uncertainty. in response to the greatest financial crisis this country has witnessed since the great depression, many of my colleagues on the other side of the aisle have decided that the answer was not to identify the cause and fix it, or identify where the government and the regulators failed.
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they decided that the solution was to attract 2300 pages, -- was to draft 2300 pages of legislation directing the same regulatory agencies that missed the crisis to come up with literally hundreds of new federal regulations on top of those already in existence, and in power a new generation of bureaucrats -- and empower a new generation of bureaucrats to exercise command and control over the economy for years to come. i talked to bankers back in alabama. they say if the regulators would get out of my bank, i could do it better job of stabilizing the mess. with the recent release of proposed international capital standards by the basel committee in switzerland, yet another element of uncertainty has been at it. we can all agree that banks in the u.s. and overseas held insufficient capital to withstand the financial panic that struck the global economy in late-2008. indeed, i pointed out when secretary paulson first unveiled the reginald tarp proposal, but a major challenge the banks -- the original tarp proposal, that the major challenge the
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banks were facing at that time was a shortage of capital, not atoxic asset problem. higher capital standards alone will not provide the stability to support a full economic recovery, or the prosperity of our citizens need and demand. over reliance on increased capital involves a trade-off that every member of this committee needs to consider. higher capital standards means less credit. less credit means fewer jobs and less economic growth. we need to make sure the standards we adopt really do make the financial system more resilient without needlessly sacrificing more jobs. on something as important as this, the administration has again failed to give the americans the certainty that need. we do not know how much new capital our banks will need to raise. we do not know how many loans they will call him to meet those standards. -- calling in to meet those standards, how many businesses and consumers will be denied credit so the banks can comply with basel three. the reason we cannot know it is
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because we are still trying to figure out how the administration is going to implement the new standards, and help those new standards will interact with -- and how those new standards will interact with dodd-frank. until those are answered, it is impossible to say whether the basel process will yield a more sustainable global banking system or, instead, serve as yet another obstacle to economic recovery. this is likely to be the last opportunity this committee has to hear from the secretary. i hope he can provide some certainty for our markets, our businesses, for citizens, and for those citizens who need jobs. our country desperately needs answers to all of those questions. i think the secretary for being here. i yield back the balance of my time. the gentleman from illinois is recognized for two minutes. >> thank you, mr. secretary, and mr. chairman. as the author of two amendments to the house-passed a version of the bill that actually survived the senate negotiation
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-- involving both contingency capital, and counter-cyclical capital elements, i was interested to see the third to last paragraph of your testimony referencing that they are still in play. i will be asking questions about that state of play and the envelope of them up -- of the negotiations, because i think there are fundamental to making this system more stable and shock-resistant. i look forward to your testimony. i yield back. >> the gentleman from texas is recognized for a minute and a half. >> i appreciate chairman frank for calling this hearing with secretary geithner the authority to set capital standards as the strongest tool regulators have, but it is essential that the regulators' reach the right balance, and they have not always done this in the past. even without the new requirements, the market as -- the market has already pushed banks to increase capital. but although these standards are complex, our committee has a responsibility to understand the position taken by the united states regulators, and the impact this agreement would help on the u.s. financial system competitiveness.
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the new standards can have just as much impact on our financial system as our regulatory system bill that we just passed recently. i would like for secretary geithner to provide us with the assurances that we are using good data and analysis to set the standards. it is not clear to me if anyone really ran the numbers on what these standards would meet, before we agreed upon it. i am also interested to know how the united states plans to implement the agreement if it becomes final, and while there are dates set out in the agreement, the timing of when the u.s. regulators' shoes to issue regulations determines when these rules -- regulators choose to issue these regulations determines when these rules are in effect. with that, i yield back the balance of my time. >> the gentleman from california is recognized for a minute and a half. >> thank you, mr. chairman. i think all of us have to remember that over-leveraging, throughout the financial sector, certainly leading up to the crisis, is what brought a
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lot of the conundrum to us. we had investment bank's leveraged at 30-1. we have fannie and freddie over 100-1. over the long run, we need to ensure financial institutions are sufficiently prepare for a downturn. as the head of the dallas fed told us, requiring an additional capital against risk sounds like a good idea, but is incredibly difficult to implement. since 1864, regulators have been struggling to stay ahead of the game when it comes to capital redbridge capital regulation -- capital regulation. one of the problems we have here is that europe is going to drag their feet. we are a point to go further, and that puts some of our firms at a competitive disadvantage. in my opinion, the most troubling aspect of basel three is its reliance on the old model of brisk -- risk-weighting assets. it assumes that the securities, which have been risky in the past, are the same that will be risky in the future. under this regime, banks will need to hold more common equity than ever against their risk-
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weighted assets, which in turn incentives these institutions to find low risk-weighted assets with some return, since these assets can be leveraged much more highly. secretary geithner, you can correct me if i'm wrong later, but this will lead to double a -- -- a rated double-a rated sauternes will carry a risk weight of zero if i read this right. looking at the cds spreads on italy, ireland -- they are far from risk-free. with this in mind, i hope you can shed some light on exactly what will make basel three different from basel two, and every other attempt at regulating capital, especially with europeans already telling us that will drag their feet on this. history is not on our side, i do not think. i yield back, mr. chairman. >> i made a miscalculation. we now have two minutes left on bets that current i'm going to take -- left on that side. i'm going to take one more minute. it occurred to me that we will
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need to focus on the european community being in the process of a constitutional evolution. the roles are not as clear. the role of the european parliament has been increasing. it was initially fairly weak. what we have encountered a couple of times now, particularly in the hedge funds, is a lack of clarity, i think, in europe, in the community, between the role of the european commission, the executive part, and the parliament. for example, with regard to hedge funds, i believe it was the case that it was the parliament that would be more restrictive i'm following up on what the gentleman from california said -- restricted. i am following up on what the gentleman from california said. one of the things we are going to have to get some attention to is that. we have begun meetings with the european parliament's committee of jurisdiction. they have their own problems with many different nations. that is one of the issues we are going to have to look at. it is not surprising. we are elected officials.
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we understand that. the kind of nationalism and resistance to the international cooperation is greater in the parliament, than in the executive. as we go forward, we need to work with our european friends. the gentleman from texas have two minutes. >> i thank you, mr. chairman. i am glad the secretary is here to address basel three. a lot to take advantage of the not an easy -- of an opportunity to agree with the secretary, that and did come up liquidity and capital standards were a major contributor to the economic crisis that we had. clearly, internationally, capital standards were not applied consistently, which in some respects it begs the question, why did we pass legislation that goes so far behind capital and liquidity standards, getting into bailout mechanism, product-than in the tories, price controls, and the list goes on. nonetheless, as important as
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basel three is, we know it will not take effect until 2013. the american people are more concerned with where are the jobs today. why does unemployment continued to hover around 10%, for almost every month that the obama administration has been in existence? the american people are asking after two consecutive trillion- dollar plus deficits, when will the madness and? when will this president, and this congress, take their flight -- take their foot off the spending accelerator, and put it on the break, as they drive down the road to national bankruptcy. fundamentally, this economy is not suffering from a lack of capital, but a lack of confidence. between the health-care bill, the tax increases, the financial regulation, the cap and trade, and mind-boggling debt, job creators are mired in uncertainty, and no nothing but hostility -- and feel nothing but hostility from this president and this congress, and i hope in the question and answer portion, the secretary
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will have an opportunity to address these topics. thank you, mr. chairman. i yield back. >> mr. secretary. >> thank you, mr. chairman, and members of the committee. i am quite to confine my opening remarks to what i regard as the most important elements of the international financial reform. you give us a very strong hand in the wall street reform act, the debt- -- the dodd-frank bill. we have used that hand to play a leadership role internationally in putting in place global standards that help protect american interests. last week, the federal reserve, the office of the comptroller of the currency, and the fdic reached agreement with their major foreign counterparts to substantially increase the levels of capital that major banks will be required to hold. by forcing these institutions to hold more capital, we will significantly reduce the risk of future financial crises, and reduce the damage caused by future failures. failures in our system of capital requirements were a major contributor to the crisis.
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we had capital requirements. they were too low, and not supplemented with commentary liquidity requirements. for the amount which it supplemented with -- supplemented with complementarity liquidity requirements. furthermore, there were no meaningful capital requirements in place for the shadow banking system, aig, and a diverse mix of large non-bank banks and finance companies. finally, capital standards were not applied consistently around the world. banks in many parts of the world were allowed to run with low levels of capital, relative to the risks they took on. i want to highlight what i retired as the most important elements of the standards -- i want to highlight what i regard as the most important standards. first, the amount of capital that banks will be required to relative -- required to hold, relative to risk, will, as i said, increase substantially. banks will be subject to two tiers of requirements. all firms only to hold a substantial minimal level of capital. in addition, they will be required to hold an additional buffer of capital above the
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minimum. these two separate requirements have been set to ensure that the major banks hold enough capital that they will be able to withstand losses similar to what they faced in the depths of this recession, and still have the appellate it to operate without turning -- still have the ability to operate, without turning to the government for extraordinary help. second, banks will be required to hold more capital against the more risky assets -- more risky products, more risky activities, including derivatives that caused a substantial role in the crisis. these assets and exposures are held predominantly by the very largest firms, meaning that this aspect of the new reforms will fall most heavily on the large banks, and have only a very modest impact on small banks. third, the agreements will improve the quality of capital banks hold. the new requirements are set in terms of high-quality common equity, tightly defined to mean capital that will truly be available to absorber losses one firms get into trouble.
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taken together, these new agreements will mean a substantial increase in capital requirements on the major banks that operate around the world. the changes in the ratios themselves, represent more than a three-fold increase. in addition to this, the new, more restrictive definitions of capital, and the more stringent assessment of capital against risk raise the capital requirements even further. again, these additional defects -- effect will fall most heavily on the largest, most interconnected, systemic institutions in our markets. in addition to these new requirements, the basel committee has agreed to impose new global standards for the equity management. these standards are designed to ensure that firms can withstand a severe shock to liquidity, without facing a deep and crisis. -- deepened crisis. finally, the agreement offers the promise of a more level global playing field, with less risk to a screeching less risk
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than we faced before -- less risk to us -- less risk than we faced before this crisis. other countries will be able to allow their banter -- banks to apply lower standards, that require bankers to run with less capital than was true before the crisis. if we were to apply these standards too quickly, we could hurt economic growth and recovery. to limit that risk, in agreement gives banks a substantial transition period to meet the new standards. with a strike -- with the stress tests in early 2009, a u.s. financial system is in a strong position internationally to meet these global rules. our major banks should be able to meet these requirements through future earnings over time, which will help protect the exit -- the economic recovery.
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this is a major milestone. we still have more work to do. the liquidity requirements will need more work before they're fully implemented i want to emphasize that the new standards are to implement by national authorities around the world to generate a level playing field. the needs to be tight, consistently-enforced limits on the ability of banks and national supervisors to apply the standards in a more permissive way for their institutions. they need to be implemented at the national level. the agreement reached in the basel three proposals must be fully implemented by the end of 2012. the united states is committed to meeting those deadlines. i want to emphasize that we will continue to work closely with this committee as we implement the financial reform bill and worked to strengthen global
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standards for a level playing field. i want to note that we are about to close another chapter in the work to end this crisis this morning, herb allison announced he was stepping down. he, and his team were the architects of what is increasingly regarded by outside experts as one of the most successful emergency programs and financial history. i want to mark that event by praising the political courage of president bush and secretary paulson, and those in congress who voted at that grave moment of financial peril to give the government of the united states the authority to solve this financial crisis. if you are a conservative republican, you can celebrate the fact that we saw the most
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dangerous part of the financial crisis, largely with private capital, not public capital. you can walk and that we have reduced those investments which welcome the fact that we have reduced those investments to a tiny -- welcome the fact we of reduce those investments. if you are in physical -- fiscal conservative, you can appreciate that losses will be in the range of $66 billion, less than 10% of the $700 billion provided by congress. if you are a liberal or progressive, you can welcome that after a lost decade for the middle class, and a crisis that left millions of americans below the poverty line, that we did not have to spend scarce tax resources on banks, which gives us more room to protect its investments in critical priorities. if you care about
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manufacturing, you can celebrate that the automobile industry is stronger today than it was before the crisis, and businesses across the country find it easier to raise capital and they did before the crisis and in the peak of off -- of the crisis. all americans should be relieved that their savings today are more valuable and we were careful custodians of their scarce resources. a lot of people who voted for tarp had to later disparage the program. i think they should be proud of the vote they cast. they were on the right side of history. thank you, mr. chairman. >> thank you, mr. secretary. i will probably see the republican leaders, john boehner. i will call your sentiments. i was just reading secretary
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paulson's book, and noted his comment from john boehner, "we would be crazy not to rescue aig." i want to talk about the automobile peace. there is a lot of discussion about our need to protect and expand the amount of manufacturing we have. there is a repudiation of the notion that we can exist is a successful economic nation, offering a full range of opportunity to all of our citizens, if we do not have a significant manufacturing component. manufacturing component gets out of rhetorical service. it's in to me the most successful effort of public policy to advance manufacturing does not get the respect. that was a decision issued by
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the initiative by president bush, and. out further by this administration, -- and brought out further by this of administration, to intervene on behalf of both general motors and crisis -- chrysler. while ford was not the beneficiary of those funds, they strongly supported the funds from the standpoint of keeping up manufacturing in america. they feared it general motors and chrysler went bankrupt, it would diminish their activity. one result would be that the amount of manufacturing -- the supply chain in the u.s. would have been damaged. the support field would then -- would have been a strong disadvantage. i ask it to reflect not just on the financial aspects, as we a talk by general motors beginning to repay, what would the effect have been on this important sector of manufacturing,
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automobiles and the supply chain to automobiles, if the bush administration, and your invention and not followed up, by initiating an intervention. >> i think the effect would have been devastating. you have seen thousands and thousands of jobs lost, hundreds and hundreds of small suppliers effected, and it would have dramatically amplified the damage caused by this recession. if you care about our capacity to make things in america again, and to make sure we are strengthening our ability to make things in this country, you need to look at that intervention, initiated by president bush, in view it as an incredible success. i do not want to understate the importance of the financial changes. the great strength of the american economy over the decade was that our financial system was the best in the world a
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providing capital to people with an idea for growing a business. we lost our way. we created a system that had too much risk. that was it devastated the state. we are on the way to restoring that fundamental strength. >> one argument against intervention is that it becomes addictive. there is no such thing as an intervention and a withdrawal. you have the private sector become independent. my view is that what we had with the financial system and the auto manufacturers was an intervention, and they worked now because be entities are doing well on their own. the argument that you cannot get back to the private thing has been repudiated. would you agree? >> i agree. no one should ever be in the position to take these steps. but, in that case, because they
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were forced to go through a deeply-wrenching restructuring process, they are emerging sooner and more profitable than anyone expected. it can stand on their own. that is now true for the american financial system as a whole. it is not just that it is stronger today than before the crisis, but we have let the weakest parts of the system go away, and those that survived were able to meet a market task -- raising private capital on the strength of their solvency. we have been very careful to design these programs in a way that makes it very likely that people would like -- look at the prospect of government intervention as an attractive option. it was devastating, but our country is stronger for it. >> the gentleman from alabama. >> thank you, mr. chairman.
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one thing i might say about the making money -- house republicans, particularly this committee of republicans on this committee, stood strong against the original proposal to toxic assets, which proved to be a real boondoggle. it was not done. we insisted on dividends and warrants. that is a part of the program that has made money. >> i compliment you on that, by the way. you said that at that time, and this was the principal cause, and the most damaging the neck was a perception that u.s. firms to not have enough capital. if you look a program, the returns to the taxpayer have been the highest because those capital investments have turned positive returns. it was the most effective value of tax payer money you could have received -- perceived of
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doing. >> at cit, chairman frank stood with house republicans -- actually, chairman frank stood with house republicans who proposed capital injections. we opposed aig a corrected secretary paulson, when he said he informed all of us. he failed to inform me. >> there was a lot commonality there. the aig intervention was in a letter appeared at the time, it did not need congressional approval. subsequently, both sides -- in both versions, we repealed the provision by which the federal reserve has done that. >> i know. i would just say that congress has gotten some credit for some of the programs which lost money, when actually the programs that made money, we
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insisted on that protection for the taxpayers. i am proud of the subcommittee ranking members of this side, and senate -- jack reed, and chairman frank, and those of support. >> i am very confident, when we look to this crisis, that if elected the full complement of what the fdic did, -- confident that when you look at the full what the fdic did, it will offer a substantial return to the american taxpayer. >> i am not debating that a lot of the actions that were taking -- taken, congress did not approve or participate in. they were unilaterally made by the federal reserve. let me ask you one question. the president recently appointed
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elizabeth warren to head up i think, the most powerful agency that has been formed by the government in the last 30 years, which has the power to allocate credit and set fees. many of us opposed giving them that heart punch affect. he has gone around senate confirmation, despite the fact the article to, section 2, says that advisory consent of the senate. he did the unconstitutional day, which was sort of an in your face. my one question is, is he going to go to the senate, or is he going to avoid that? because he put a presidential appointee under the white house, he could claim executive privilege.
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is he going to assert this executive privilege? >> third, the bill gives the right to the federal reserve is much as $30 million to fund the agency. will congress have any control over that, which i believe it constitution also provides that we control the spending? >> before you answer, mr. secretary, i want to say that i was supportive of that process, but i would be unhappy if there is any obstacle to elizabeth warren testified before the congress. i hope we can get an affirmation that that won't in no way be an obstacle. >> congressman, let me start with the following. there is no risk that this agency, although it is true it has been given substantial authority -- what this bill
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does too, is take a bunch of authority that were spread across multiple federal agencies and put them in one place, so there is one place with a dedicated mission to provide americans better protection for their and ensure security. it was a necessary, just act. the president is going to nominate a person for the senate to confirm to lead this agency over time. what he has asked elizabeth warren to do, with my full support, is asked her to play and buys a role for us, as we help stand up this agency, and find out how to make the best use possible of the basic law. we are absolutely committed to doing this in a way that strikes a careful balance. the first thing we did was convened a group of experts to talk about how to make mortgage
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disclosure more simple and accessible. why is that important? disclosure is one of the most powerful tools we have so people can make sensible decisions, shop for the best deal. >> we all support disclosure. can you guarantee us that she will not exercise any rulemaking authority until senate confirmation? >> the president will nominate a director for confirmation by the senate. on the specific question of testimony, it is my expectation, of course, that she would be happy to testify with respect to her duties at the treasury in this role as advisor to me and the president on the initial design of this agency. and the question of rule writing authority, the statute makes it absolutely clear what the
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authorities the agency has before there is a confirmed director and date of transfer. it is fair to say, until the 40 is transferred, which will not happen before july of 2011, and before there is a confirmed director in place, this agency, by statute, has very limited authority to write new rules. we will try to use the interim time to build a stronger consensus on how to improve disclosure appeared >> if she picks the rule makers, that this kind of a stacked deck, too. >> that authority is with the president and me, and does not fall anywhere else. none of us can have powers that the statute did not give us. >> we disagree with a lot of that statute. >> disagreement with the statute that has been signed with all law does not have a lot of legal
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force. >> i believe in a row of lockers >> that is the statute that you disagree with. >> i am not advocating -- disregard for the law. >> when we wrote that law, it occurred to us that senate confirmation might be problematic. it is not accidental that there were abilities to function until the senate confirmed somebody. >> we also wrote into the law that he or she would be appointed by the senate, the advisor and consent of the senate turned >> the gentleman from kansas. >> thank you, mr. secretary. with all focused on what went wrong, but i think it is equally important to focus on the responsible actors and build on their successors. we held a field netting in kansas to listen to and learn from responsible banks sell or not the cause of the crisis.
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while the smaller firms were clearly not too big to fail, many raise the question to what extent the basel three act and the dodd-frank bill helped end date -- too big to fail. i will ask that question to you. >> you have to look at capital requirement effect, and what dodd-frank did to our ability to dismember a major institution without causing huge damage to the american economy. capital is important. it has a powerful, sought to defect. it raises capital requirements for everyone else, too. they are more likely to the door of the trauma that could happen when a major firm collapses. -- of sort of the trauma that could happen when a major firm collapses. what the bill does is essential.
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if, in the future, it says, that if a major firm manages itself to the stand point where it cannot survive, we have no option on the bench to put it through a dismemberment processed that protect the innocent -- that protects the innocent. those are the most effective ways we know for and in the problems associated with too big to fail. -- ending at the problems associated with to big to fail. that put much tougher restrictions on the institutions, then the small. we want to preserve the financial system that relies on the strength we get from having 9000 banks across the country but provide critical financial
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services to mainstream america. >> thank you. the reason the basel agreement appears to be very good, triple in the capital ratio appears to be a very its debt. i am pleased that the new agreement is counter-cyclical, building nine key provisions -- building on key provisions. mr. secretary, would you discuss how the counter-cyclical nature of these new standards will strengthen financial stability? if they had been in place 10 years ago, when they have helped mitigate the recent financial crisis -- would they have helped mitigate the recent financial crisis? >> absolutely. we would have been in better position to handle a recession like this if we had a tougher requirements in place. to tackle the chairman, one of the most important things -- to
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tackle the chairman, when of the most important things the dodd- frank bill does, is rely capital requirements. previously, they did not exist for range of institutions that competed with banks. that was catastrophic for the system. dodd-frank supplies an evening -- evenly. what this agreement does -- i will give you two examples of how it? the system morris -- of how it gives the system more cyclical. he wants to reduce euphoria in a boom, and reduce panic in a crisis. the best way to do that is to make sure people operate in a bowl with hire requirements, so they can get into those as they faced the losses. this agreement allows jube to
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run with 7% -- this agreement allows you to run with 7% against risk. as you did into that cushion of capital, -- get into that cushion of capital, you have to reduce compensation, which make the system less pro-cyclical. we are still examining whether we can complement this framework with other forms of contingent capital, counter- cyclical capital, to make the overall system less vulnerable to booms and panics in the future. i did not think we found an answer to that question, but we are in a better position. >> the gentleman from texas. >> thank you, mr. secretary. i am a strong proponent of
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making sure these entities are adequately capitalized. i believe part of the problems we faced were we had entities that and not have the capital to sufficiently cover the risks they were taking. as i read of the agreement that was reached, i see a couple of things. one, we will increase capital requirements across the board and and increase or more clearly-defined what capital needs to be. what you do with those entities is raise the cost of capital. in order to be able to continue to generate the returns to investors in these entities, obviously, there will be huge pressure to increase their income or revenue streams. one of the questions that pops
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into my mind is is there a point where we put into -- where we increased risk your behavior to meet returns to pay for this capital? how do balance that? >> it is worth worrying about. the architects were careful to take that into consideratio this is one way -- consideration. this is one way to explain not -- to take more risk, you have to hold more capital. if you like the mistakes made prior to this crisis, people were able to hold onto all sorts of assets that they thought were risk-free, that actually had a lot of rest. that was a costly failure. by raising the risk, you have to hold against the complex, and apparently more risky activities -- inherently more risky activities.
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capital does not solve everything. indeed, a risk-management system. controls, cut supervisors -- tough supervisors, and you have to be able to make sure you are not going to far. if the capital standards are too high, you will encourage people to move risks of side of the banking system again. you need to get a balance. i think this is a very strong agreement, and has a much better balance than we had before the crisis. >> one of the key parts of that is the regulatory structure, and making sure the risks are being identified and recognized. let's take a bank in the u.s. that has a 7% capital requirement that they are meeting, and a bank in another country is meeting at 7% but
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their regulatory structure is that as rigorous. so, in fact, that bank is able to engage and leverage their risk in a different way. how do the fact the markets in that -- how do we protect the markets in that way? >> we are very worried about that. if you look at what the system was like before the crisis, there was substantial scope for other banks to run with much lower capital. the required minimum was lower. they can't count all sorts of stuff to count as capital that we did not a lot -- thought they could count all sorts of see up as capital that we did not allow. if you that the mistakes we made in the united states, it is hard to understand this, but, in fact, the requirements for our banks were substantially tougher than many banks around
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the world. this narrows the capacity for countries to have their system run with lower standards. it is much tighter definitions of what counts as capital and a higher overall minimum standard. the combination of those things is as much more confidence. it is not enough. we need to work to make sure the as the regime is operating, we do not let too much discretion seeped back into the system that would put us at a competitive disadvantage we will make the system much more transparent. -- disadvantage. new will make the system much more transparent. we will monitor very carefully, and pursue much more aggressively any signs of differential standards. >> will there be specific risk
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premiums on certain types of assets that everybody across the spectrum will be required to use in analyzing the amount of capital and the risk in their portfolio of assets? >> it is not quite that. there is risk in that approach. if you have the government prescribed the risk-weights, there is a risk that people can arbitrage are wrong that and the the system more risky. it make sure that there is a common framework for how you measure risks. that framework has to be common across countries. it is not perfect. there is still a lot of risk. people will operate it with different degrees of rigor. we have a much better chance that we will be able to watch this stuff on a quarterly basis, and see where firms who compete
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against each other are operating with different standards of what occurred >> the gentleman from north carolina -- set standards of >> the gentleman from north carolina. >> thank you mr. secretary, i am committed to getting as much tax payer money back, as well as the conservatorship of fannie and freddie. . .
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, there were warrantees about the mornings that were in the pools that had been purchased from the securityizers, the big for the most part big banks. and mr. can jorski, ms. spires and i sent a letter to president obama last month urging that all of those claims be pursued. mr. franks since then has supported that or support that
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had position. do you support, do you support pursuing with enthusiasm legal claims that we may have to minimize our losses? >> absolutely. >> so you support the subpoena, the request for information? >> i don't think i can speak with sufficient care or clarity today about the precise legal tools we have available to us but it is very important to us that we are very aggressive in pursuing the taxpayers interest and limiting the scale of cloffs that were inherited at the time of conservatorship. >> was potential liability caken into account? the securityizers who presumably would be the defendants in any litigation are the 19 biggest banks that got the stress test. was there potential liability taken into account at all? >> i don't think so. i would have to refer that question to my colleagues in the fed.
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but the broad parameters of losses that were estimated on morning exposures were very, very tough. very, very tough. in fact, the loss rates that underpinned the stress test assumed losses higher than banking faced in the great depression. >> they were off the books at that point. >> but they were very careful to also try to capture the contingent off balance sheet exposure. but i will refer to the fed your question about precisely whether. >> but there is also pendling litigation that so far has not gotten passed certain procedural defenses but may well end up getting past the procedural defense business the private purchasers of those morning backed securities. some hedge funds that would have substantially identical claims to the claims that fannie and freddie would have that would be pursuing in the
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conservatorship. it seems that if they get past -- and the litigation brought by the massachusetts attorney general seems to show that almost all of the mortgages failed to meet the subprime mortgages failed to meet the representations and warrant ayes. that seems to be venture company litigation for those banks. could you also consider that or let me know if that liability was taken into account in the stress test? >> i will be happy to refer those questions. of course we have your letter and we are looking through the issues and how best to respond to those. but we will be happy to respond to those. >> mr. chairman my time is close enough to having expired. i yield back the balance of my time. >> the gentlemanwoman from -- gentlewoman from illinois. >> thank you, mr. chairman. secretary geithner, you said in
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response to ranking member balks that until july the cfdc new agency will have very limited authority to write new rules. and acknowledged that before next july it will plan to do that. but i noticed yesterday that you and i guess it's adviser warren. is that what she will be called? hosted a closed door meeting about morning disclosures. and in the treasury press release you were quoted as saying moving quickly is in a series of concrete steps we are taking. and you continued that whenever possible we are commited to expediting completion of the laws requirements ahead of statutory deadlines. changing the morning disclosures required under ress pa, to me, is costly to small
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businesses. we have been working on whether the trying to get the federal reserve and h.u.d. to work together on irning those out and that seems to be a long process and didn't really get there, i don't think. but with this endeavor or any other rule or regulatory change spear headed by you and ms. warren, do you plan to consider the consequences for small businesses and how do you plan to do that? >> let me just say that i think it is very hard to look at the existing body of regulations in these years that were designed to improve disclosure and protect consumers. and be proud of what they've achieved. both in terms of the burden they impose on people providing financial services as well as the benefit provided to consumers. and i think my own personal view is where we have authority , like in this area, to try to combine these foriums and bring
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convergence or put new protections in place, it is an obligation to us to find ways to streamline the existing body of rules that have outlived their usefulness or did not meet their stated objectives. and i think we have substantial scope to do that and i think it is important to try to demonstrate that we are not just putting new rules on top of old bad ones, that we are cleaning up the underbrush and trying to lighten the burden o on people in the business of trying to borrow responsibly. >> you have a description of the steps the agency has taken to minimize credit for small entities. this is going to be such a problem with what businesses are facing and looking at what is the law right now and how it is going to change.
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you spent so much money trying to work out what the new ress pa tla that has been put into place trying to change this. and also, adviser warren has criticized the treasury's data as sparse. and she says, reasonable people may disagree on how to help small businesses gain access to loans but the solution must begin with a clear understanding of the problem and yet treasury has gathered only space data on the small business credit crunch. do you agree with that? or is this something that's going to have to be done? >> i don't agree with that. but i can take this opportunity to say that congress is on the verge of passing a vet of very powerful not just tax benefits for small benefits which we think will improve morically than would otherwise take place, but a very well designed set of credit programs limited to community banks that will help give them the resources to lend more to growing small
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businesses. and my own view again probably based on our experience with the initial investments we made under the tarp is that those programs can have a very substantial positive effect on increasing the availability of the credit that small businesses are still living with the scars caused by this crisis. and i think that the senate passed this bill last week and i am told that the prospects are quite good that it will be the law of the land quickly. >> what our treasury plans to assess the impact of the new rule or regulation on -- >> i'm sorry. you are right to say that the dodd-frank bill also has the set of requirements that you referred to that make it clear we have to carefully combamen the small businesses. but to cite the example you said, i find it -- i am very confident that improving disclosure and simplifying forms will not just make it
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easier for consumers to shop for best financial products but do so with a lower burden on the people who provide those financial services. i cannot believe, this is not rocket science, we can do a much better job than we've done today in reducing the burden on people in part by simplifying the forms in the disclosure. >> i hope so. but will there be a comment peer? >> absolutely. we have a set of important obligations on transparency requirements for comment, and we will meet those obligations. >> thank you. >> the time has expired. i will make an announcement. i will be at the rules committee at 5:00 today to ask for a rule on that small business lending bill. and it is our intention to ask the house to accept the senate version of that bill tomorrow. the gentleman from texas mr. green. >> thank you, mr. chairman.
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i thank the secretary for appearing. good afternoon. sorry that i arrived a little bit after your testimony. we have quite a busy day on the hill today, a number of hearings. let's talk about for just a moment the alternative. we have a proposal. can you explain to us what the alternative is? it seems as though there is the notion thats there something much, much better that we could be doing if we would but only do that something that's much better. what are the alternatives? if we don't increase capital requirements, what is the alternative? >> congressman, i believe there is no alternative. you can debate how much is too much, how much people should achieve. and we can debate and we will continue to work on ways to make the system more resilient. make these shock absorbers work
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in a way as congressman and others have suggested that makes the system less procyclical. and we have more to do on that but there is no credible alternative to let leverage, higher capital requirements, more stable funding requirements on institutions, financial crises all have in common that single basic failure that firms were able to operate with less leverage and that's what brought our economy to the edge of its knees. >> now, what you're attempting to do and we are attempting to do is to make this as global as possible. would you please address the transparency necessary to implement this in a global market? >> clear measurable, simple standards that countries not just have to commit to abide by, but they have to pass
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national regulations to make those rules apply to their institutions. disclosure requirements so that the world can look at those institutions every quarter and see whether they are holding enough capital to meet those requirements. a long ongoing effort to monitor enforcement by supervisers on as consistent a framework as we can. those are the principle elements of what gives us the hope that we have a much tighter set of constraints, and a more level playing field globally. >> and finally, the deaf figs of a bank, that will be universal such that we won't have some country that concludes that these institutions, while they look like banks and they lend like banks, they really are not banks? >> unfortunately, that was a uniquely american problem. in every other country around the world they had the
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authority to apply capital requirements, even if they called themselves merchant banks or housing or banks or investment banks or commercial banks, our system was unique in basically saying we had two worlds. a set of banks that had rules, and a set of all sorts of other institution with different types of names that didn't have rules. that's why consumer protection was such a failure and that's why this crisis was so much more severe because people were able to take a huge amount of risk without being subject to those constraints. so i do not believe that we face material risk that countries having scarred by this experience, this crisis, and it was in many ways harder for other countries to decide they were going to let people evade those basic rules. and if that happens, we would work very hard to convince them that, in their own interest, they want to extend that protection to those nonbank
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institutions. >> i thank you very much and i look forward to hearing alternatives from those who contend that this doesn't work. and i thank you for the time. mr. chairman, i yield back the balance of my time. >> the gentleman from texas. >> thank you, mr. chairman. mr. secretary, i think it was the day before yesterday that the nation awoke to the news that by a narrow definition of economists, that the recession ended 15 months ago. clearly, there had been no celebrations in the street for obvious reasons. i really don't have a specific question, but i really have a statement and a request. having spent months now speaking to people not only in my own congressional district, but for tune 50 c.e.o.s, billionaire investors and, most importantly to me, small business people in texas one word, one word continues to come to the forefront of the discussion.
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uncertainty. uncertainty. you've probably seen the fnib poll that a generational low. hopefully you are hearing their voices. the chief economist bill duncanberg for the nsib talked about the tax rates, health care, discussion of that, the deficits, quote, scare us to death. the business roundtable, the voice of big business, government is injecting uncertainty into the marketplace making it harder to raise capital, create new business. the u.s. chamber, it is fundamental uncertainty that is holding business back. look at the tax costs, look at the health care bill. now, again, i know that the administration is not going to relitigate and congress is not going to unpass the health care bill much less the fen reg bill. but the sheer volume of rule-makings that will take place under this legislation by
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any historic standard, although perhaps the recession may have ended by some narrow definition, clearly the recovery hasn't started. the recovery will not start until this administration working with congress fundamentally begins to remove the uncertainty and listens to the voices of job creators. and i do not believe that voice has been heard here to fore. so that is a combination of a statement and a request. now, in that vene, i do have a question. you mentioned earlier about this, i believe you said we have legislation pending for tax incentives for small business. but, unfortunately, you also have proposed legislation that would impose taxes on small business, specifically the administration's plan to increase marginal rates for the top 2 brackets. according to jct, the joint committee on taxation, that includes 50% of all small business income, the fax
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foundation has reported that the top two brackets, that two thirds of that revenue produced will come from business income, and so on top of the uncertainty now we're adding yet another tax on business in general, small business in specific. why? >> congressman, let me just start with something you said in your opening comments and before you asked that basic question. this reform bill will correct mistakes in how we managed our financial system that caused devastating damage. and as we bring clarity to the rules that will prevail, as my colleagues chairman bernanke and others did last week on capital, that has been helpful to provide clarity. and if you look at how the markets respond to that, they were, frankly, reassured that the rules struck a good balance
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between stability and basic growth. and it is very important to us as we move forward with this bill that we bring that same standard of balance. now, i talk to businesses across the country all the time as well, and i will say -- >> unfortunately my yellow light has gone off. could you address the question. >> i talk to businesses across the country as well, and i would say it is unmistakeably true that businesses across this country, as are average americans, are still living with the deep scars caused to their basic confidence caused by the basic crisis. and the principle question, frankly, is how fast is the economy to grow, going to grow in the future? and we are having, i frankly -- a very welcome debate about what is going to encourage investment in the united states in future growth. and let me -- >> the seconds are really ticking down, mr. secretary.
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so do you push back on the data? are you not proposing a tax increase on a% of small businesses? >> i -- 50% of small businesses? >> i would ask unanimous consent that we ask three additional minutes. we have a fairly significant debate going on here and if there is no objection we will do another three minutes. >> so let's discuss what we agree on and what separates us. we hope you will join us in passing these set of very powerful tax incentives for small businesses in the small business bill. i'll give you an example. 100% expensing for any investment. zero capital gains on investments. these are very well designed tax incentives. the republicans have supported with fervor in the past. we have proposed that congress join the president in proposing our for a temporary period, full expensing for one year for capital investments by all businesses in the country again to give them the inventive to
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make those investments today. we have proposed that the government start a multiyear program of improvements in public infrastructure that will help put more people back to work but improve future growth rate. where we have proposend and i think congress will support this, to decide soon to extend the middle class tax cuts that go to not just 97% working americans but to 97% businesses. >> but it's still 50% of the income, mr. secretary. >> that is a deeply misleading, as you know, characterization. >> well, i don't know mr. secretary. >> but i'm going to come to it. it is my time. >> republicans want to work with you on the immediate expensing. certainly on the capital gains tax relief. i would say, though, that what you give with one hand this administration more than takes away with another hand.
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>> not true. >> so at the end of the day, mr. secretary, i don't think this administration with its proposals is fundamentally addressing the uncertainty that is keeping job growth to almost nill in this economy. otherwise, again, we wouldn't continue to be mired in almost 10% unemployment almost every month of the existence of the administration. so i suppose we'll just have to agree to disagree. the chairman was generous in giving me an additional 3 minutes. i do want to move on to one subject. consider can i respond to that? >> i will ask for an additional minute for the skerked to respobbed. and then it is the gentleman from texas' time. >> if you look at the full impact of our suggestions we extend today the middle class tax cuts our proposals for enhanced business expensing for all businesses and our proposals to jump start a multiyear public investment program, the net inpact on growth for this country at this time of grave challenge would be much, much more powerful, a
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substantial multiple, than simply deciding to extend those tax cuts that go to 2% of small businesses and 2% of americans in the country. >> i think you got your point across. the gentleman has the remaining time. >> thank you, mr. chairman. and unfortunately, mr. secretary, in this particular forum i'm allowed to have the last o word. i do think it is curious that one of the sing lt most quoted economists by democrats is mark zandy who said, quote, it would not take much more of a pullback by the affluent than anticipated to derail the recovery when he advocated not raising taxes on the top 2 brackets. in the roughly 45 seconds i assume i have remaining, one question i have, you may respond in writing. i understand the cainsian argument behind the stimulus. i don't agree with it. i believe it is ineffective. here's what i don't understand. at a time where we are
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absolutely drowning in debt, where we know that gross debt is now over 09% of gdp, that history tells us we could lose economic growth because of this, why in your ten-year budget plan do all you do is extend the deficit, extend the debt in the outyears? surely you do not believe under your policies we are still going to be mired in this recession three, four, five, six years from now. what explains the spending and the doubling of the debt in five, tripling the debt in ten held by the public? >> your asking me to go out and borrow billions to extend tax cuts of president bush that would expire for 2% of the wealthiest americans in the country. there is no plausible argument that is a fiscally responsible action for the government of the united states at this time. >> you could have reduced spending and it is going to cost $2 trillion. >> this is the last answer. i don't think i've been tough
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on time. mr. secretary, conclude your answer. >> i was just going to observe that the proposals the president made in his budget would reduce our deficit by more than half as a share of gdp if you join us in approving those over the next five years. >> the gentleman from missouri, the long suffering gentleman from missouri. >> thank you, mr. chairman. thank you for being here, mr. secretary, and thank you for the very difficult job you perform. but it is appreciated. let me just start out. in 1870s, thomas edison created a phenomenal little deal called a light bulb and afterwards we ended up having the creation of a major corporation called general electric. and we had this unique little
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creation born here in this country. at the end of this month, ge will discontinue making incan dessnt lights and the plant will be closed. this light will not be made anywhere in the united states. the cfls actually use about 75% less electricity. but the negative part of it is that because it's circular there's a lot of hand labor involved. and now the united states will import almost all the cfls from china, which gives me great pains. the stimulus also provided some opportunities for the department of energy to help companies get involved in the green technology. i mention all that because in your september 16 testimony in the senate, you said and i quote, we are commited to
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promoting policies in both the united states and china to create new opportunities for americans and grow jobs in the united states, and we are not leaving these outcomes to chance. and so i am wondering what, tell me and hopefully others what the administration is doing that would make certain that we are not leaving this to chance. considering china is probably making some big mistakes as they are underwriting many of the factories that are doing this work and doing big land deals which could conceiveably cause them to have a real estate crisis later on. but i am interested in your response. >> a very important question. and i would suggest the following. it is very important that we do things in the united states that increase incentives for americans to invest and build
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things here rather than overseas. and the proposals you referred to in the recovery act to provide very substantial incentives for investment in new technologies basic science, research and development, new energy technologies are part of that process. but we are going to have to do a lot more in that context. and it's very important for us to recognize that the most important thing we can do for manufacturing in the united states is to do a better job for improving incentives for companies to invest here rather than outside the united states. that's not enough, though. it's very important that our companies face a level playing field around the world and that's why it's so important that we continue to try to encourage china to let their exchange rate reflect market forces and to end practices that discriminate against u.s. companies. and we are looking for ways to making a little bit of progress but we've got a long way to go in that front. but you've got to do both invest more here, and make sure
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we're being as effective as we can and making sure other countries are not pursuing policies that put our firms at disadvantage. >> mr. secretary, thank you for your time and thoughtful response. >> the gentleman from delaware mr. castle is now recognized for five minutes. >> thank you, mr. chairman. mr. secretary, sort of following along the lines of mr. hence rling questions, one of the things that i hear out there and you do, is the lack of certainty with certain of our policies that we do here in congress that perhaps the white house does tax policies obviously one, regulatory policy another. as you know we passed legislation involving credit cards and we have passed other legislation involving banks that et cetera. is it to the best of your knowledge a broad question maybe beyond your testimony here today. but to the best of your knowledge, does the administration focus on this and perhaps the need to introduce stability to get whatever it is we have to get done and leave it alone and make it permanent so business
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ks make decisions based on whatever the laws are, not what they might be one or two years from now? >> absolutely. and that's one reason we don't think congress should wait in providing clarity to the tax treatment that's going to be overwhelmingly important to again 97% of working americans and small businesses. and if we can, we're to give them additional incentives to invest here. it's not rocket science. it doesn't take a lot of time to do. i am very concerned by the extent to which you talk to businesses and individuals across the country. they think there's some risk congress won't act to extend those middle class tax cuts and that's a remarkable thing. because it would be a deeply irresponsible act to leave them with uncertainty longer than we need to. on the regulatory front, i can only speak to the issues that are part of the financial reform legislation and there we
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have a challenge. these are very complex rules. they are very important we get them right. the legislation gives us deadlines we have to meet. those are very tight deadlines but they still mean we are going to be in a six, 12, 18, 24 month process before we bring those down to earth. and i think the best way we can provide a little bit more confidence that we're going to get the balance right like we did in the capital rules is to make sure we're listening carefully to people in how to design them. everyone affected by them. and try to, again, demonstrate by our actions like we try to do on capital that we're going to get the balance right. and capital is a good example and we should hold ourselves to that high standard. when the rules were clarified that certainty was very helpful. i don't comment on the market but if you look at what happened to how the world looked at the financial system when the rules were clarified, they were more confident that
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they knew what they were going to mean. and our banks are in a good position to meet them. that's a high standard and we're going to try to meet that. i absolutely agree with you, bringing more certainty to what these new rules are going to be is helpful. >> i met with senator carper and you are bankers in my state, delaware, and one of their complaints was they have varying regulators. but one of the regulators are being so restrictive in the kinds of loans they can make that they can't really help the economy as much as they would like. they claim that they are making loans and the regulators -- and they've made their cuts. and the regulators are coming in and saying you have to go further than you've already gone. and it's really restricting them in terms of what they can do. i can't, i have no idea of the accuracy of that statement. but it's concerning. if we are somehow by our own regulatory policies, et cetera,
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cutting off the possibility of investments that might help our economy recover, that would be a problem. i'm sure you probably heard this complaint. any comments you have about that. >> i've heard that concern from banks across the country and you and your colleagues. and i know that chairman bernanke and chairman bare and the occ are very aware of those concerns. and they are trying to make sure that their supervisors and examiners don't overdo it. but the biggest challenge facing small banks around are many of those got exposed to commercial real estate don't have capital and finding hard to raise capital. that's a powerful concern than the concern you referred to. and that's one reason why we hope this bill gets through because what this bill will do is give those banks the ability to come to the treasury and get an investment from the treasury at a very economically attractive price. and if they expand lending we reduce their dividends lower. so it creates incentive to
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expand lending. that's why we think it's such a promising bill. >> a final question. and you may have -- i missed the beginning because i had other meetings. but did you comment or would you comment if you didn't on where we are with the gses. i still believe that was the genesis of a lot of our problems. >> you are absolutely right that the gse's were a substantial contributor to the financial crisis and as you all are aware of the losses they acaccumulated in the decisions they made before conservatorship are very substantial. we have begun a process as has this can i to look at a range of options to how to replace these with a better, more stable system. and we are running a very careful process of bringing experts together and looking at ideas of all sides. a bunch of staff members from the republican side, democratic side came to a conference we held at the treasury last month on this, and again we're trying to make sure we look at all
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ideas with no presumption on it. and our obligation under the law, i believe, is to bring forward legislation. i think mr. chairman, early next year. in any case, that's the time line we expect to meet. >> thank you. i yield back the balance of my time, mr. chairman. >> the gentleman from california. >> thank you very much. thank you for being here secretary geithner. you and i have disagreed a bit about whether or not government should basically deny or discontinue certain risky products. you have said to me many times you believe that you manage those, you regulate, but you don't use the power of the government to discontinue products. you still feel that way? >> i believe that there are certain practices, activities.
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i will give you an example. paying a morning broker to steer a customer into a loan they can't afford that generates more fees in the short term is not a practice we should support or condone. but i think the best way to manage the risks in financial innovation in a market financial system is to make sure that we require institutions to hold more capital against the more complex financial products. and i still think that's the more effective approach. >> i see that where you basically talk about banks will be required to hold more capital against more risky products and activities. but what i'm concerned about is whether or not you think at a or no documentation loans are something that you should hold more capital against that kind of risk when you are not documenting income et cetera. why should that product be in the market in the first place? >> i believe it is very important and the law gives us
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new authority and mandate to do this, to make sure that banks when they make loans to people, have to be able to demonstrate that the individual can afford those loans. within their capacity to pay. and i think that's very important. and if we do a better job of that as a country, it is inconceiveable to me that we'll get back into the business of letting people get a loan with no documentation. >> have you ever heard of a 30-year fixed adjustable rate morning? >> i have. and i find them appealing in their simplicity in terms of their terms and benefits. >> a 30-year fixed adjustable rate morning is a contradiction within itself. that's number one. number two, if there is something called a 30-year fixed adjustable rate morning that is marketed to a 60-year-old couple where it
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will reset every year up to 10% interest, and by the time they're in their 70s or 75 or 80 years old, it will be substantially more than what they got into it for. do you think that's a decent product? >> i misspoke. i thought you meant just a classic 30 year fixed. >> no. and i use that as an example of products that are on the market that should not be on the market. there should not be anything called a 30 year fixed adjustable. it is a contradiction. >> having listened to you more carefully i apologize. i understand your concern completely and personally would not want to be associated with anything like that. and i think that's the kind of practice that should not be possible in our post reform financial system. again, it should not be possible for banks or brokers to steer people into mortgages that they cannot understand and cannot afford.
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it was a mistake for us to allow it, and i think this new law gives us the power to prevent it. >> well, thank you very much mr. secretary. let me just say this. you keep talking about steering. they should not be steered into that kind of product. that kind of product should not exist. i mean, it is not that the product is all right as long as people are not steered into it who can't afford it. that product at a products serve no -- adjustable rate products. and i'm hopeful our bouro will be able to get the kind of support from you and others that will take those kind of products off the market. so i keep asking you this er time i see you because i'm hoping you're going to change your mind and you're going to find that there's just some product out there that you would ban tomorrow if you would the power to do it.
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>> if the gentlewoman would yield. while there is not a general power in the consumer bureau to do this, the morning section is a more specific section and i believe that that the morning in the morning area, with pre-payments, et cetera there is a power to ban certain products. it's mortgages, they have a greater power than other areas. >> i certainly hope that ms. warren will get that kind of support. finally if i could indulge for 30 seconds. there's something in the wall street reform bill called the creation of the offices of minority and women inclusion. are you aware of it? >> absolutely. >> and have you started your agency on the implementation? >> we have started. but we're not there yet. >> and you know you have to have it done in six months? >> i do. >> and you know that some of us worked very hard. >> i do. and i very much respect the reasons you did it. >> thank you very much. i yield back the balance of my
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time. >> the gentleman from new york mr. lee. >> thank you. and mr. secretary thank you for coming before us today. i wanted to start off by addressing two issues which are near and dear to me based on my background in manufacturing and in seeing what has transpired with manufacturing in this country over this last decade and its demise. i know last week you were in front of the house ways and means committee regarding the undervaluing of chinese currency and you expressed concern similar to that that the currency reform for fair trade is not a viable option because of the belief that it may not be wto comply nt. at the same time, you said, quote, the administration is using all the tools available to ensure that american firms and workers can trade and compete fairly with china unquote. it's been apparent for years that china's currency is pegged to the u.s. dollar and it is severely undervalued. yet the administration refuses to officially list china as a
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currency manipulator and based on yours and ambassador kirk's statements also refuse to discuss a legislative option. mr. secretary, if these issues are off the table, i'd like to know specifically what the administration is doing to address our disparity with china and create a level playing field for american manufacturers who are hurting. >> can i clarify one thing? i was careful last week not to comment on the basic question about whether that particular draft legislation was consistent with our international obligations. you imply that i said it wasn't. i did not say that. we obviously want to make sure that any legislation that is passed is consistent with our obligations because if it weren't it wouldn't give us much leverage. i believe, as i said last week, the two most important things for us to do as a country are to work with countries around the world to have china appreciate their market force which is we are working very hard at doing. they're starting that process
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but they haven't done much yet. >> a very anemic level. >> i said that very clearly last week. and we believe, as i think you do, that the exchange rate is significantly undervalued. >> as we say, we can't dictate what they pay their workers, what their regulation is. but when you're talking about something as basic as market forces with currency, a 30 to 40% disadvantage is killing american manufacturing. >> i think it has a very substantial adverse material effect. but that's not enough and i want to make it clear on this. in addition, and this is a real problem for us, we face a number of practices by the chinese government that do discriminate against american producers in the united states and those who operate in china. and we're tryinging to abcourage them to end those basic practices. and we want to do both. >> and i think we should. because if we keep kicking the can down the road we will not have manufacturering in this country as we know it today.
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i want to switch to something else because i know i've got limited time but it's another issue that is very important to me based on having a lot of retirees in my district. last year i spoke to you during one of our visits and asked your thoughts on the ineek table treatment of pensioners for more than 20,000 dell fi retirees, the majority of which suffered significant cuts during the restructuring of gm and the auto task force. you replied that your team would sit down with me and provide answers as to why these workers were treated differently when pensions were topped up presumably with tarp funds provided by taxpayers. to date, despite multiple requests both directly to you, auto task force, the president, i have not received any substantive reply to my requests. i have now tried a different avenue and have secured official investigations through signature tarp and the g.a.o., but frankly i would like to try
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one more time to hear from you, mr. secretary, exactly why the administration, your department, are refusing to make public all the documents concerning how unfair and unjustified this decision has been. >> absolutely we will work with you. and the range of bodies that oversee these programs, to make sure they have all the information. and i will reaffimple my commitment to you to have those people come up and meet with you and your staff to talk through this very complicated, very difficult problem. >> well, and i will take you to your word on that because this is something we have now been working on for 18 months and we have a lot of retirees who have been drastically impacted. i meet with them on a regular basis, and it boils down to fairness. period. all they're looking for is to be treated as if we had to take a hair cut let's do this thing equally. but it appears they've really been singled out. and i'll hold you to that. with that, i yield back the balance of my time.
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>> i will just add i just received a letter from three of our colleagues on a similar, on the identical issue. so i would reinforce they asked for something similar. and i'm going go to have them join with mr. leave and we'll work on that. another reason is that under the consumer bill that was passed there's a particular section on mortgages and there is greater power on mortgages than in general. and the product that the gentleman from california mentioned could be under that special morning power. the gentleman from illinois. >> thank you, mr. chairman. i guess i would like to start by asking for a recognition that the sufferings of a scientists are no less than those of those as a minister when you listen to this politicized debate here. anyway, and also but actually as -- >> if the gentleman would yield. he got me back wards. i said the minister could bear
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it more. >> understood. but also, as someone who started a manufacturing fimple myself, i would like to associate myself with the comments of the republican colleague there. the chinese currency manipulation is a fundamental problem that has to be fixed and fast and you're going to find lots of friends on both sides of the aisle for pushing you. and if there's a role for congress in playing bad cop in this we're happy to play that role. a couple. one quick historical comment. on the ultimate cost of tarp which you mentioned. it's interesting to compare that to the ultimate taxpayer costs of the savings and loan bailout that happened under the bush one and reagan years. which was 160 billion of 1990 dollars, or about 3.2% of gdp. the numbers you just quoted which i had not heard, 66 billion dollars or less than half a%. so a fraction the ultimate taxpayer cost of this emergency
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intervention will be about one fifth that of the savings and loan bailout. now, question i had, there have been recent stories about the toxic assets and whether or not they've actually cleared. and so my question to you. at the time of the requirements actually take hold, first, are these continuing to do damage on the balance sheets of financial firms? and will that damage largely have cleared at the time it kicks in? >> i do not believe. let me say it in an affirmtive way. because of what we did in the early stage of 2009, the major u.s. banks that account for a substantial fraction of banking in the country now hold very, very substantial levels of capital against the risks that they retain on their balance sheet. so doy not believe that those potential losses are now are a material source of risk to the recovery or the stability of those institutions. and that is a remarkably important accomplishment.
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now, it is still true that community banks across the country that got themselves exposed to the commercial real estate are still facing tough problems still and they have a long way to go to work through that. and for some of them it's hard to raise capital which is one reason why this small business lending program is so important. >> in regards to bansle. are there agreements in the pipeline having to do with institutionalized stress test standards for risk management, treatment of sovereign debt risk in the standards? >> it is our view and i'm not sure i can speak with the right degree of precision about what the law requires and what the consensus in bazzle is at this stage. but i think it is very important to for supervisors around the world on a regular basis to conduct stress tests to try to capture the potential risk of loss that banks might
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face in the future recession. and that's a very good test over time about whether the capital requirements that are in place are actually delivering enough capital over time. so i'm very much in favor of that and will work to make sure we do that on a regular basis going forward. >> they must be standardized if they end up being what drives the capital structure of these large financial firms as important as the basic formulas. >> they should be standardized in the sense they need to capture a crisis with the same level of severity and loss. and that sense, i totally agree with you. >> and can you say a little bit about the state of play of contingent capital a little more. >> i would say it this way. there is still tremendous appeal to us in designing a form of contingent capital that would again make the overall banking system less prone to periods of mania, euphoria, and less prone to panics and
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deleveraging you see in a crisis. and we are looking at, and there's a group of experts in the u.s. and around the world that are looking at a whole range of ideas of how to design those instruments in ways that would work. and you've thought a lot about this and i respect your views on this and happy to talk more elsewhere, but the problem we find is how you design in a way that would be real, really available in a crisis, not be punetively expensive, and not come with the risk that you have to require the uncertain judgment of officials, bureaucrats around the world to trigger their -- now, there are ways around the problems but we haven't found the perfect thing yet. >> thank you. i yield back the balance of my time. >> thank you, madam. good afternoon, mr. secretary. you certainly have given us your position, mr. secretary, on the tax cuts. my position is that they should be extended for all tax
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brackets. i believe we agree, however, that certainty is required. mr. henceling has raised this. mr. castle and i raised it again. in the administration's judgment, when should we engage in certainty on the tax cut issue? in other words, should dwow that now while we're still in session, or should we wait until after the election to the lame duck session of congress? >> that's really a question for the leadership on both the democratic and republican side. >> and i think it's a question for the administration. does the president and do you as secretary of the treasury have a position on that? >> my view, and the president has said this, is that since there is very broad agreement on the merits of extending the middle class tax cuts that go to 80% of working americans and small businesses, that why not act to extend those as soon as we can and we can still have a debate about what to do with
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the rest of them but why hold those hostage on whether it makes sense for us to go out and borrow $700 billion to add to our future deficits to add to those. >> could you be a little more definite in what you believe the time period should be? >> not on the question again. that's a question where the leadership of both houses on both sides would have to come to a judgment. >> regarding your indication of your belief of borrowing $700 billion for the top 2 brackets. what percentage of income is that? you indicate two or three percent of taxpayers. what percentage of total income is that? >> well, obviously it's a larger share of total income. but the right way to think about it economically is to think about the overall effects object economy relative to gdp of extending them. >> what percentage of income? >> it would be a very small fraction of gdp, which is
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overall national income. but i think the right way to think about it is that i think it's very hard to find an economist that would argue that if the economy needs more support, and we're a country with not infin nite resources, that's -- >> well, your former colleague has indicated he favors extending all of the tax cuts for two years. >> no. first of all, i won't speak to his opinion, but our view is that the best thing to do for the country is to extend those tax cuts for middle class americans and small businesses as quickly as you can. and if we believe the economy needs additional reinforcement, as we do, then let's find a way to give additional incentives to businesses to invest here in the united states. let's do that as soon as we can. >> thank you. madam chair, is it permissible for me to place in the record the op ed peeze of mr. oirs zag that was in the "new york times" on this issue? >> without objection.
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>> thank you. in another area, mr. secretary, professor warren has been named an assistant to the president. i understand that. is she technically a person who is on the staff of the white house or on your staff, mr. secretary, or on the staff of both the white house and the department of the treasury? >> she is an adviser to the secretary of the treasury. her office is in the treasury. but she is also has the positional title as assistant to the president. >> so does she report to you or to the president or to both of you? >> well, as the dual title scombplizz and as the president made clear, she reports to both the secretary of the treasury and the president of the united states. >> and do you favor an early appointment of a director so that that appointment might go apappropriately before the senate will? >> i do and it will. >> and could you define with a little greater precision what your definition of early might be? >> early.
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in the sense i think it's in the best interest of getting this agency up and running to have a confirmed director in place as soon as we can. >> during this session of congress or in the next session of congress? >> again that's sort of the question for the leadership. but as i said, i think early -- >> i think it's a question for the president and the administration since it's the president who has the constitutional responsibility. >> and he will meet that responsibility. >> at an early date? >> at an early date. >> thank you, motch. i yield back the balance of my time. >> thank you -- madam chair. i yield back the balance of my time. >> thank you very much. >> thank you, madam chair. thank you for being here. i'm sorry i didn't have the benefit of your testimony or the prior questions. let me ask two issues. is there still a shadow banking system out there that we need
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to be concerned about that is still not appropriately regulated? >> it is a shadow of its former self-. but, yes, there are still institutions that are not legally banks that operate in the credit markets, financial markets, and play a significant role. and one of the most important initial tambings we have under the dodd-frank bill is to designate what universe of institutions should be subject to the capital requirements we're discussing in this hearing today. >> so that shadow banking system will continue in place until we get those rules in place? is that what you're say sng >> what the -- one of the most important provisions of this bill gives us the authority for
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the first time to make sure that for institutions that play a critical role in our financial system, whatever you call them, banks or nonbanks or investment banks or -- that they come into a common framework of rules on leverage so we protect the system from their risks. >> i think i'm driving at a slightly different issue that some of the minority members of this committee, minority racial minority members of the committee tried to raise this. there's some shadow institutions in our communities that have profound impact on what's going on in our communities that don't have systemic impact on the system. thoselet ones that i'm asking -- those are the ones that i'm asking the question about. have we done enough in this bill to rein in or regulate
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those institutions that don't necessarily have systemic risk to bring down the whole system but still prey on communities, prey on consumers who really have very few options for credit or transfer of money in the at least they perceive, in the regular banking system. >> apologies for misunderstanding your question. absolutely. what the bill does is give us the authority for the first time to make sure that the basic protections consumers need to borrow responsibly are extended not just to banks but to consumer finance companies, to morning brokers, to pay day lenders. >> who would have the primary responsibility for that? would that be the consumer financial protection bureau or some other agency? >> the consumer financial protection bureau will be the